Automotive extended warranties: peace of mind or waste of money

Most new car warranties last three to five years. After that, you’re on your own. Unless, of course, you purchase an extended warranty.

Having financial protection against car repairs certainly sounds reassuring. But are these extended warranties, also known as service contracts, really worth it?

Your factory warranty is up – now what?

New car warranties don’t last forever. Most vehicles come with a 3-year/36,000 mile limited warranty that covers everything from bumper-to-bumper. A 5-year/60,000 mile powertrain warranty, which covers major components like the engine and transmission, is also included.

But once the manufacturer warranty has expired, you’re responsible for paying for repairs out of pocket. And that can be a scary thought, considering major automotive work can cost thousands of dollars. That’s why extended warranties appeal to many consumers.

Note: The following is for informational purposes only and should not be treated as a substitute for professional financial advice.

What is an extended warranty?

An extended warranty isn’t really a warranty at all. Rather, it’s insurance against unexpected repairs. There are two basic types of warranties: those sold through the vehicle manufacturer and third-party, aftermarket plans.

Extended warranties from the automaker are available exclusively on cars sold at brand-name dealerships. For example, Ford only sells contracts on Ford vehicles purchased through Ford franchises.

On the other hand, aftermarket warranties are offered through a variety of outlets. So, if you’re buying a used Pontiac Aztec at Lucky Joe’s Auto, if you can get coverage, it will be through a third-party provider.

Both types of extended warranties have their pros and cons. Typically, policies from the automaker:

Are more expensive than those from third parties
Provide coverage similar to what the vehicle came with when new

Meanwhile, aftermarket warranties:

Typically cost less than those from the automaker
May have greater limitations and less inclusive coverage

What’s covered

Extended warranties cover unforeseen repairs – not maintenance and wear items. In other words, a routine service, such as brake pad replacement, would not be covered. Why? Because brake pads are considered a “wear and tear” item designed to be replaced at some point during vehicle service.

When it comes to repair coverage, most providers offer different levels of protection: a decent, good, better and best. Often, these are referred to as bronze, silver, gold and platinum or something similar.

The further you move up the ladder, the more comprehensive the coverage. For instance, the Bronze Package may only cover the engine and transmission, whereas the Platinum Package is nearly bumper-to-bumper.

Obviously, all providers are different, so you’ll need to read the fine print to see what’s covered.

What is the cost and duration?

The cost of an extended warranty can be anywhere from $1,000 to $3,000 – sometimes even more [3]. Of course, if you pay for the protection as part of your auto loan, you’ll also accrue interest over time, as well as potential fees. Most plans are good for three to five years, though the duration may vary [5].

What to watch out for

The right extended warranty has the potential to relieve financial stress. But the wrong one can needlessly subtract funds from your bank account.

That’s why you have to be hyper-vigilant when reading the fine print. A few factors you’ll want to be cautious of include:

A large deductible: Like other forms of insurance, warranties may have a deductible. Make sure the plan you choose either has a reasonable deductible or no deductible at all.
Coverage loopholes: Look closely for loopholes such as unreasonable exempt pre-existing conditions, excluded components and other work-arounds.
Hidden fees: Some contracts may only pay for parts – not labor. You need coverage for both.
A cumbersome claims process: Some companies require you to pay out of pocket then wait for reimbursement. And that can create a lot of problems on your end.
Ridiculous maintenance requirements: It’s acceptable that you be required to follow the manufacturer’s maintenance schedule. But any obligation beyond that is a red flag.
Limited repair options: Some warranties only allow you to have your car fixed at the selling dealer. Choose a plan that lets you select whatever qualified repair facility you’d like.
Outright scams: Scammers may solicit you via mail, phone or email with a warranty that sounds too good to be true. And guess what – it usually is.

Also, it should go without saying that you should research the warranty company before making a commitment. As with any type of insurance, some providers are more reputable than others.

Should you purchase an extended warranty?

A 2013 study from Consumer Reports found that 55% of owners who purchased an extended warranty never used it [5]. And many of those who put it to work didn’t rack up enough repairs to offset initial costs.

Unsurprisingly, the people who used their plans – and were happy with their warranty – were mostly owners of infamously unreliable brands. BMW owners were the most likely to actually cash in on their coverage, followed by the likes of Chrysler, Dodge and Mercedes-Benz.

Owners of reliable brands, such as Honda and Toyota, were less satisfied with their coverage because, well, many of them never had to use it.

So…what should you do?

Some experts suggest an extended warranty might provide stress relief for owners of unreliable cars. But if you’re looking at a vehicle known for dependability, a warranty probably isn’t worth it. Also, instead of purchasing coverage, you can always opt to put aside an emergency repair fund.

Any type of insurance, including an extended warranty, is a gamble. You’re hedging a bet against whether or not your car will have a costly repair. It’s up to you to decide if that sense of security is worth the cost. Starting with a fair and accurate assessment of a vehicle at purchase is essential.

POMCAR is a nationwide provider of used vehicle pre purchase inspections. PPIs are all we do. We have an extensive network of qualified technicians ready to perform a 270-point inspection and deliver a meaningful report. Check us out at www.pomcar.com

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