Extended warranties come with the promise that you no longer have to worry about that rattle coming from your engine, and instead can drive with the peace of mind that if something breaks, you are covered. But is it better to buy an extended warranty that might cover some potential problem in the future or chance it and pay for repairs as they come?
“Unfortunately, there is really no sort of clear answer,” says Ron Montoya, senior consumer advice editor at Edmunds.com. “It all depends on your comfort level on handling repairs if you weren’t covered.”
So, what exactly is an extended warranty, where do they come from, what do they cover and are they worth it? Let’s take a look at each of those issues one by one.
What is an extended warranty?
In its simplest form, an extended warranty is a contract between you and someone else that says that if your car breaks down during a set period of time, they will pay to repair it. It's not a standard car insurance policy.
“It’s a nice way to alleviate peace of mind issues — a nice way to be completely covered,” Montoya says.
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Extended warranties are designed to kick in after your original factory warranty expires – which may be three years or 30,000 miles — or more depending on what automaker you chose. Some original factory warranties can last a decade and cover you for as much as 100,000 miles.
You can typically buy an extended warranty from the original carmaker, from a third-party company or from the dealership you bought the vehicle from. Depending on your particular contract, all repairs may be included, or the plan may come with deductibles, which could be as much as several hundred dollars per repair.
The contracts also differ greatly in where you are allowed to get the vehicle repaired, as well as how you are reimbursed once the repairs are made. Some warranties require that you only bring the vehicle to one particular dealership’s shop, while others will let you pick any mechanic.
Some extended warranties make you pay up front and then mail you a check to reimburse you, and some will work directly with the repair shop to pay for everything without you ever getting your credit card involved.
One of the main arguments in favor of picking an extended warranty involves the increasing complexity of today’s vehicles.
“As technology gets more expensive so do the repairs,” Montoya says. “If something breaks down with advanced safety features, those cost more to replace than in a traditional car. If you are out of warranty, you would have to pay for that.”
What do extended warranties cover?
Factory warranties that come with new cars typically have a period of “bumper to bumper” coverage. That means that during that initial period, if anything goes wrong with the car, be it the clock on the dashboard, the exhaust system or even the fuel injectors, the factory will pay to have the problem resolved.
Some extended warranties — known as “wrap policies” — also cover the entire car. Others are specific in what they cover, such as just the powertrain, or in the case of an electric vehicle or hybrid vehicle, just the battery and electric system.
When you are shopping for an extended warranty, it’s important to know whether your policy is inclusionary or exclusionary – that is, do they specifically spell out what they will cover (inclusionary), or do they say that everything is included, except for certain systems (exclusionary).
Knowing the difference is important when it comes time to file a claim, because nothing is more disappointing that assuming your transmission is covered when in fact it is specifically excluded from the policy.
Is shopping for a warranty complicated?
When you are shopping for extended warranties, one important thing to keep in mind is that you definitely want to shop around and that you do NOT have to purchase them when you are buying the vehicle, Montoya says.
That high-pressure sales pitch in the finance manager’s office is probably not the first time you should be thinking about whether or not an extended warranty is for you.
“Get price quotes. Call up the dealership in advance and ask about the specific details,” Montoya says. “There is a lot of variation in pricing.”
One thing most consumer advocates agree on, however, is that you should not purchase an extended warranty based on an unsolicited telephone call or mailing. Typically the companies that seek out customers in those ways have less-than-savory business practices and may not offer the type of coverage you are hoping to purchase.
Also, pay attention to whether the contract is transferrable — that is, if you sell the vehicle, will the new owner benefit from that coverage? Alternately, if you sell the vehicle, can you cancel the policy and get a refund for any unused portion?
Will you get your money's worth from longer coverage?
One recent study conducted by Consumer Reports found that 55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy.
That just shows the nature of what you are buying and reinforces that you need to make a personal decision about whether an extended warranty is right for you.
“Of course there is no guarantee that anything is going to go wrong with your car. But you are buying this in the event something happens,” Montoya says. “If you use it, you may feel great about the purchase. If you don't use it you will probably feel like you wasted your money.”
According to the Consumer Reports study, the median price paid for an extended warranty was just over $1,200. Among survey participants who used their policy, the median out-of-pocket savings on repairs covered by extended warranties was $837.
So, on average, Consumer Reports found that the typical customer lost money in the transaction. They went on to say that extended warranties enjoyed some of the lowest satisfaction ratings of the products they study.
But that doesn't automatically mean that an extended warrantey is a bad idea for everyone.
In some cases, such as if you are purchasing a vehicle with a poor reputation for reliability, or a reputation for being expensive to repair, an extended warranty may offer some much-needed peace of mind.
“There are some vehicles that tend to have the reputation to be expensive to repair when they are out of warrantee – European luxury vehicles — for example,” Montoya says.
That Consumer Reports study said BMW owners were more likely to have used their extended warranties than any other brand we rated, with 71 percent saying they had done so. Chrysler owners were next, at 65 percent, followed by Dodge, at 63 percent, and Mercedes-Benz, at 60 percent.
That said, Montoya adds that reputation can only get you so far.
“No brand is perfect. Stuff can happen no matter what you drive,” Montoya says.
When making your decision, you should also consider how long you plan to own the vehicle, and check some online cost-of-ownership tools, such as the J.D. Power Vehicle Dependability Study.
Vehicle reliability and repair costs only make up half the equation, though. The other half comes down to your particular financial situation — what are your spending habits? How is your cash flow? Are you a high-mileage driver? How are your cash reserves?
In each of those situations, it might be worth the peace of mind of knowing that you are covered if your vehicle poops out.
“If you would stress out when a repair comes due, you might seriously consider an extended warranty,” Montoya says.
If you decide to take the leap and purchase an extended warranty, nearly everyone agrees that the best bet is to shop for it before you go into the financing office. And also keep in mind that you can pass on it initially and still purchase one later, provided you haven’t driven you car to an excessively have high mileage.
Another best practice is to check with the better business bureau to see if the company you are considering is a scam. More than a few warranties are offered by companies that take your money and then find any excuse to not cover what goes wrong with your vehicle.
Montoya says he personally likes seeing people buy them directly from the original manufacturer.
And if cash flow isn’t a problem, Consumer Reports suggests another option would be to invest that $1,200 in an interest-bearing account, so you’ll have an emergency fund in case of a breakdown. And if you don’t need it, you already have a down payment for you next vehicle.