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Extended Warranties

Are They Worth It?

Buying a car, either new or late model used, is said to be the second biggest investment most people make, after purchasing a home. With such a major outlay of cash, which in many cases is an on-going obligation over several years, many seek to protect their investment.

With so many things that can go wrong with an automobile, especially one that is used, the pressure to purchase extended warranties is understandable. But is it the right thing to do?

There are a number of things to consider regarding these extra cost warranties, and before your name is placed on the dotted line, you should consider your situation, the merits of the warranty and whether it is worth the expense.

Do You Really Need One? As a customer, you want assurances that the previously owned "cream-puff" that you are about to buy will provide you with the dependable transportation that you desire. Having a warranty doesn't insure that you will be free of all service and repair worries, but it can help your piece of mind. But are the extended warranties available really necessary? Also, are they as reliable as the smiling sales person with pen in hand would lead us to believe?

In some cases they can be a good value, but being prudent and alert to different factors can help make your decision that much easier.

After your potential new purchase has been inspected, and you are satisfied with the report, the decision as to which type of a warranty, if any, you will need comes next.

Most modern cars are built for lasting reliability with a minimum of maintenance. Frequent oil changes, annual cooling system flushing are a thing of the past, and even factory recommended transmission servicing has been stretched to 100,000 miles. The major components of most cars today can reliably hit 200,000 miles -- or more.

No warranty covers those things which wear out constantly. Tires, hoses, belts, brakes, batteries, and light bulbs are normal replacement parts. You're responsible for those, or they may be covered by their own warranty.

When buying used, it is quite possible that the original factory warranty may still be in effect. These are transferable, so you'll pick up full factory coverage for the remainder of the warranty. For cars that are one or two years old, and have reached less than 50% of their factory warranty's mileage limits, an extended policy is probably a waste of money. An exception: it has a clause where the policy doesn't go into effect until after the factory warranty has expired.

Most factory policies are based on a combination time/mileage plan, such as three years or 36,000 miles, which ever comes first. Quick calculations show that while this sounds like a generous amount, it allows for only 1000 miles per month of driving. If you commute an average of 40 miles a day to and from work, and fifty miles a day on the weekends, this easily is 1,200 miles per month, way over the monthly limit. If your purchase is two-years old with original three-year/36,000 mile coverage, and the car already has 30,000 miles on the odometer, chances are you'll only have another five or six months of coverage left. These same calculations should be taken into consideration with any used car warranty.

What to Look For As with most things you buy, the more you spend the more you?ll get. Basic plans should include coverage on such items as the engine, transmission, front (and rear) wheel drive components, and basic electrical devices such as starters and alternators. A more deluxe package might include power and convenience options, smaller electrical and mechanical components, and even basic body repairs due to premature corrosion. Few if any plans will warrant wear and tear to soft trim items such as vinyl tops or interior upholstery items.

One enticing factor sales people will use to get into an extended warranty is to offer to roll the price into the final purchase price of the vehicle, and financed as such. But remember, on a five-year contract every dollar you finance may come back costing you up to two dollars over the term of the loan.

Be sure you understand the limitations of the warranty as to who and where repairs can be done. Don't take a salesperson's word on these terms -- ask to see them in writing. There may also be restrictions that limit where and who can repair your car. Also make sure you know who is financially responsible for getting the car to the shop if it needs to be towed in. Be positive that if covered repairs have to receive prior authorization, the method to achieve this is nothing more than a toll-free call away.

Another thing to be aware of is where your money is going, and who is providing the financial backing for the warranty. While the dealer may be the taking the order, more than likely they are not the ones who actually administer the warranty and back up the policy. (This also applies to extended warranties on new cars which may not be backed by the factory.)

Especially in the past, some warranty plans are often handled by independent companies, and this is where you can run into trouble. Remember, these extended warranty companies are essentially betting that your car will not need any major repair work during the time of the policy's enforcement. By selling thousands of these warranties, they will take in more in sales than they have to pay out in repairs. They're working the odds based on frequency of repair research, service costs, parts availability and cost, etc.

However, if the company providing the policy miscalculates and repair costs out-strip warranty sales, the losers are those who bought the policies before the company files for bankruptcy. Even if a shop has received authorization for covered work, if the warranty provider fails to pay it will be you that the mechanic will come to for payment.

The more reputable warranty providers have addressed this concern by reinsuring their program through a major insurance company that ultimately backs the warranty. The warranty company, in effect, becomes sort of like an insurance agent selling you mechanical breakdown insurance. The original warranty price is split between the agent and the insurance company, and the overall profitability of the warranty company is usually determined by the profitability of the program. It is in everyone's best interest to insure only reasonable risks at a price that will support the long-term survival of the program. You should make absolutely sure that your coverage is backed by a large and at least "A" rated insurance company.

Many car companies offer factory-backed extended warranties. All US manufacturers and many imports will gladly sell you extended coverage through their dealers if your vehicle qualifies. Check with your local dealer for availability. In general, factory-backed warranties are the easiest to work with, although many of the independents have come a long way in customer care since the seventies and eighties.

Several independent programs, such as First Extended, which is a branch of the Dura-Lube Corporation headquartered in La Canada, California, and Wynn's (the automotive additive company), are also available to consumers seeking extended coverage. These programs are generally offered through automobile dealers, but you can sign up yourself as well.

There are many other direct to consumer companies, too. Often these engage in direct mail and internet advertising to market their products. Prospective customers can enter their own car's year, make, and model, with current mileage, and get a quote on based on three (usually) plans. See sidebar for more info.

Enterprise Car Rental (and others) operates their own "Certified" used car program. Selling mostly their own rentals, they offer their customers up to a one-year/12,000 mile warranty on most major mechanical components with each car purchased, with several optional plans available. Often, however, these cars carry their original factory warranty anyway, so the extra coverage they offer may be of little practical use.

There are some catches to all of these programs. For one, proper maintenance backed up with service records may be required by some of these companies. There may be a deductible. In addition, you may have to bring your vehicle to an "approved" service to have any warranty work performed, and there are usually exclusions to the coverage. Make sure you read all the fine print, and it's a good idea to get a list of what's not covered, as well as one that tells you what is, before you sign up. Be sure to check all sales contracts before obligating yourself, your bank account, or your car's future mechanical health.

What's It Going To Cost?

Cost varies significantly from model to model. The lowest prices are found on vehicles that are still covered by a factory new-car warranty. This is for obvious reasons. We do not recommend purchasing an extended warranty for a car already covered by the original warranty. Once the vehicle is out of warranty, the cost depends on the age of the vehicle, general reliability, service and parts costs, and mileage. Costs can vary anywhere from a few hundred dollars to two-thousand plus. A six-year old Mercedes would be at the high end of the spectrum, while something like a four-year old Accord or Taurus would be at the lower end. Like shopping for the vehicle itself, it pays to check more than one source.

Finally, extended warranties purchased through a dealer usually carry a hefty markup. The price you are quoted is negotiable, so don't accept the first figure you're given.

Conclusions

With a late model car, there is a good chance that an extended warranty isn't worth the purchase price when compared to typical repair costs. Of course, as a vehicle ages, repair costs can go through the roof. Unfortunately, it is difiicult to get a warranty on older cars that covers the things that break with regular frequency. However, many people find comfort and peace of mind just having that piece of paper in the glove box. If that's you, shop for the best coverage you can find and rest easy at night! Just be sure you read it over carefully. Check out the small print, and don't be afraid to ask questions. It's your money, and you have a right to know exactly what you're getting.
Lemon Insurance