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An extended warranty can buy you peace of mind, but are they really worth the added expense?
What They Are, and Aren’t
An extended warranty or “vehicle service plan” covers your new or used car once it’s outside the normal warranty window. It’s basically additional insurance against the cost of future repairs. They certainly can provide peace of mind for car buyers. Whether they provide much else is up for debate.
Often when buying a new or used vehicle, the salesperson will pitch you extended warranty coverage costing anywhere from $1,500 to $4,500. Below we’ll help you think through such an offer before you’re in the dealership squinting at the fine print with pen in hand while the salesperson refrains, “I can only promise you this number until the end of the day.”
Doing the Math
Like all forms of insurance, an extended warranty wouldn’t be sold if it wasn’t profitable for the seller. In the case of extended car warranties, this means that the balance between premiums and repairs remains in the issuers favor.
Let’s do a thought experiment to help us evaluate an extended warranty. In our scenario you’re purchasing a 3-year old vehicle with 30,000 miles on it. The proposed extended warranty would cover your purchase up to 10 years or 100,000 miles for $2,000. So, are you going to “use” all $2,000 worth of coverage over that time?
Here are a few things to consider when answering that question.
- How long do you intend to keep the vehicle? Are you they type that likes to trade in vehicles every three years? In that case, an extended warranty probably won’t be worth it. If, in our scenario, you’re looking to keep the vehicle for many years, you might run into major repairs. Even so, an extended warranty still might not make sense.
- What’s the expected reliability of the vehicle? Vehicles can vary considerably in their frequency and cost of repairs both on an annual and lifespan basis. If you’re considering a brand or vehicle that has better than average reliability, the less likely you are to ever have a repair that needs warranty coverage. Yes, transmissions do fail, but more often it’s a water pump
- What’s covered? And what’s not? Often extended warranties will have limitations on what is covered under the policy. Most exclude preventative maintenance and general operating maintenance like oil changes and fluid replacements. Additionally, many have carve-outs and exclusions for specific scenarios or certain equipment like driver assist technology. In fact, this is probably the biggest complaint consumers have about extended warranties; when it comes time to use it, they find the warranty company won’t cover the repair. It’s best to read the fine print on a warranty contract and ask specific questions of your salesperson so you know what will and won’t be covered.
- Where can I get my vehicle repaired? Another important exception that’s often built into warranty contracts limits where your vehicle can be repaired. Some warranties will stipulate that your vehicle can only be repaired at the dealership or at an affiliated repair shop. If that dealer sells out or goes out of business, your warranty may be rendered worthless. Still, many manufacturer warranties will cover repairs at the business of your choice.
- Who is actually administering my warranty? It’s also important to know who is actually issuing your warranty. Many dealers are selling third-party warranties (the same is true of banks and credit unions when you apply for a car loan), as opposed to factory/manufacturer warranties. Third party companies may be more disinclined to honor a claim than your local dealer or a major manufacturer.
- Is there a deductible? A deductible can cut both ways when it comes to an extended warranty. You might have to pay a few hundred dollars out of pocket on a claim when you’ve already bought an expensive warranty. But policies that have deductibles often cost considerably less than those that don’t.
Other Considerations
Wrap Policies: A “wrap policy” fills in the gap between a factory bumper-to-bumper warranty, which is typically 3 years, and a powertrain warranty that’s often anywhere from five to ten years. A wrap policy extended warranty would cover non-powertrain repairs after the original bumper-to-bumper warranty has expired. Again, it’s important to read the fine print to see what is and isn’t covered in such a policy, especially when most of the costliest repairs would still be covered under a powertrain warranty.
Buy Any Time: Though the salesperson will likely be pressuring you to purchase an extended warranty right when you buy a vehicle, you don’t really need to rush into the decision. You can buy an extended warranty whenever you like on most vehicles (excepting ones with at high mileage).
Research First: Like the rest of the car buying process, it pays to do your research. If you’re at all considering an extended warranty, it behooves you to shop around for quotes and coverage before talking turkey with a salesperson. That way you’ll be in a much better position to negotiate
Avoid the Bundle: When buying an extended warranty at a dealership, you’ll often be presented with merely bundling that expense into your new car loan. Often, adding $1,000-$2,000 on top of your loan means you’d be underwater on that note. Never a good thing. Plus, you’ll probably be told that the warranty will only cost X dollars per month. As with our general car buying advice, ignore the monthly payment and focus on the total price.
Caveats and Alternatives
Buying an extended warranty is a gamble, an expensive hedge against unlikely misfortune. But, for those in search of peace of mind, an extended warranty might still be worth it, particularly if you need to defray the costs of repairs. For many, a transmission replacement or a suspension repair can represent a financial catastrophe. Spreading that $1,500 expense across the life of your loan via an extended warranty is one way to dodge that bullet.
And yet, you can always set the money aside for repairs. Return to our hypothetical scenario where you’re offered an extended warranty on a 3-year old vehicle. It usually isn’t until around 60,000 miles or more before a vehicle encounters a catastrophic failure that would make an extended warranty worth the expense. In that gap of 36 months, you could save an average of $55 dollars a month and have the $2,000 in hand to use for any future repairs.
TL;DR
For most car buyers, extended warranties aren’t worth the expense. But if one would make you feel better about your purchase, make sure to do your research, shop around for quotes, and read the fine print.
