Extended Warranties – Are They Worth It?

New cars come with several manufacturer warranties, including bumper-to-bumper, powertrain, and corrosion coverage. If something happens to your vehicle within the allotted amount of warranty time or miles, the manufacturer covers the expense, promising your new purchase will be dependable. But it’s during the ensuing years when costly repairs are most likely to arise, forcing you to reach into your savings, perhaps deeply. Extended warranties can close the financial gap once the original warranties have ended. Whether you should purchase one depends on several factors we’ll explore.

1. What’s an extended warranty?

Also known as a vehicle service contract, it kicks in once the manufacturer’s original warranty has expired. Usually, this runs from three years or 36,000 miles to six years or 72,000 miles, whichever comes first. Some automakers offer longer warranties covering the powertrain.

The contract covers the cost of repairs, including labor, parts, and taxes, although a deductible may be required. There are also outlined terms that must be met. For example, if the transmission fails and you haven’t followed the manufacturer’s maintenance guidelines, repairs may not be covered.

Not all parts are covered, either. For instance, tires are warranted by the tire manufacturer only. However, roadside assistance to replace or repair that tire may be included.

2. Where do you get one?

Once the manufacturer’s warranty ends, the extended warranty begins. Most such plans are not offered by the manufacturer. Instead, your dealer, car insurer or auto club may offer them.

These plans differ and are based on the length of the contract, what’s covered, and your cost. You may also find multiple plans offered by the same company, providing varying levels of coverage based on the cost of each plan.

Read the contact particulars to learn what’s covered and where the work must be performed. Usually, you must drive your vehicle to an authorized repair center where an estimate of your repairs is sent to the warranty company for approval. Once approval is made, the repair center completes the work. The invoice is then forwarded to the warranty company who pays the repair center directly. You may still be responsible for a deductible as well as for any non-covered expenses.

3. Is it transferable?

If you sell the vehicle, the warranty may be transferable to a new owner. If so, a fee may be assessed by the warranty company.

On the plus side, a transferable warranty can increase a car’s resale value. Keep this point in mind when you’re preparing to sell.

4. You may never recover your investment.

Extended warranties can cost between $1,000 and $2,000, in some cases much more. The cost includes commissions, which is money paid to salespeople to convince you to sign on the bottom line.  If you change your mind, you should be able to cancel the contract and receive at least a pro-rated refund.

If you obtain an extended warranty at the time of purchasing your car, it’s usually rolled into the financing. This means your monthly payments will increase and interest charged, which further increases your cost. If you never use your warranty or you don’t take full advantage of the coverage while it’s in effect, you’ll probably lose money.

5. Are you considering an unreliable model?

Who would buy an unreliable vehicle in the first place? Lots of people. We’re sometimes drawn to a vehicle by its low price or to it special features without considering overall reliability.

We measure reliability in a number of ways, including the average number of repairs per vehicle, recalls, powertrain problems, and other factors. Businesses such as J.D. Power and Consumer Reports rate vehicles, shedding light on just how reliable a particular model is.

Clearly, the value of an extended warranty increases if your car may spend more time in the repair shop than average. You should also know that an extended warranty may not include the cost of a replacement vehicle while yours is being repaired. You’ll need to budget for that cost and consider the inconvenience of not having your car.

6. You might be better off banking future repairs.

Before you commit hundreds, if not thousands of dollars to cover a vehicle service contract, you might be better off setting aside funds to cover potential repairs. You could begin by saving a small amount each month and increasing your savings once the original warranties expire and after you’ve finished paying off your car loan. For example, saving $20 or more each month early on and then banking your car payment amount once the loan is paid off can increase your savings rapidly.

With this option, you’ll have cash on hand for repairs. You’ll also begin saving money for your next car purchase, perhaps building a large down payment in the process.

The bottom line

Extended warranties provide consumers with a car-protection option after the manufacturer’s warranties expire. They don’t cover tires, but they do cover the rest of the car. Compare plans and never sign a contract unless you’re confident a vehicle service contract will benefit you.

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