Extended Warranties Unraveled

by Don Elliott on November 8, 2011

Every new and used car dealer will ask if you would like an extended warranty on the car they just sold you. Extended warranties are an extra revenue source for car dealers. Extended warranties would seem difficult to sell after the dealers have spent a considerable amount of time telling you how great the car is, but that isn’t the case.

Extended warranties are not really properly named. Warranties provide auto repairs and maintenance for a predetermined period of time. Warranties are also included in the cost of a product. Extended warranties should actually be referred to as service contracts because they are bought separately from the purchase of the car.

First, a few quick facts about extended warranties:

  • Extended warranties do not have to be purchased from a car dealer.
  • Service contracts (extended warranties) are available for new cars, used cars, and even cars with high mileage. They can be bought at anytime for your car, not just when you buy the car.
  • Extended warranties can be bought for different terms, with varying deductibles, and with good or bad coverage.

New cars come with a manufacturer’s warranty. Minimum coverage is 3 years/36,000 miles. Some warranties are as long as 10 years/100,000 miles. Extended warranties kick in after the new car warranty ends. They are least expensive to purchase when the car is new. There is an obvious benefit for the underwriter that they don’t kick in for several years and can often be included with new car financing.

Never buy an extended warranty based only on price. It is likely that a less expensive contract covers fewer things. For example, does the policy cover both mechanical breakdown and wear and tear items? Is the deductible per visit or per repair? Will the extended warranty provider pay the shop directly or do you have to pay shop and apply for reimbursement? Is the warranty transferable if you sell the car? Do you get a rental car while your car is being repaired? These are all important factors that you should consider.

Before buying an extended warranty, read the entire contract. Every contract stipulates some level of regular maintenance. An overdue oil change could prevent coverage for an engine repair. Make sure that you know what the extended warranty covers. Anti-lock brakes and “overheating of any kind” are often excluded. There are often stipulations on what car shops are authorized to perform repairs, so keep that in mind before taking your car for repairs.

If you decide to go ahead and purchase an extended warranty, be sure to check out the company before you sign on the dotted line. Be sure that the warranty administrator is well funded and has a solid reputation. Unfortunately, the extended warranty business has more than its share of unscrupulous vendors.

One last tip! It is always a good idea to get pre-approved for car service before the shop starts the work. The extended warranty administrator will confirm that the shop is eligible to do the job, what they will pay to be completed, and what to do if additional repairs are necessary once the work is started.

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