You spent plenty of time researching buying a new or used car, taking test drives, and securing financing, but there may be one question you’re not prepared to answer: whether you should buy an extended warranty.
The term “extended warranty” is actually a bit of a misnomer. True warranties are included in the price of a product. Extended warranties are more like service contracts because they cost extra and are sold separately. Whatever you call them, they’re designed to cover the costs of certain repairs, often picking up where the manufacturer’s warranty ends.
The greater question we address today is, are extended warranties frivolous or a good deal? To help you decide, here are seven questions to ask before you buy an extended warranty on a car.
Question #1: How long do you plan on keeping the car?
The length of your car’s manufacturers warranty varies, but most new vehicles offer at least a three-year/36,000-mile bumper-to-bumper warranty.
If you plan on keeping the car for three years or less, then paying for an extended warranty probably doesn’t make much sense.
But according to a 2016 analysis from IHS Markit, the average car buyer holds on to their vehicle for six and a half years. If you’re likely to drive a car long after the manufacturer’s warranty ends, an extended warranty may be worth considering.
Question #2: What type of car are you buying?
In 2013, Consumer Reports surveyed more than 12,000 subscribers who purchased an extended warranty. They found the people most satisfied with their purchase were owners of car brands whose reliability consistently rank as average or below average, including BMW, Chrysler, Dodge and Mercedes-Benz.
If you’re in the market for a Honda, Subaru, Toyota, or another brand that earn consistently high marks for reliability, you may be better off skipping the extended warranty and covering repairs yourself.
Question #3: What is covered?
Before you buy an extended warranty, Alex Lauderdale, Transportation Analyst at EducatedDriver.org, says it’s important to note that your warranty may not cover all repairs. “Policies differ wildly, and it’s important to read the fine print carefully,” he says. “Most companies will provide an exclusion list, letting you know exactly what repairs are not covered.”
Most extended warranties don’t cover regular maintenance or “wear and tear.” Some warranties cover parts but not labor. Others have high deductibles, which can seriously diminish the value of your coverage.
In the Consumer Reports survey mentioned previously, among respondents who used their extended warranty, the median savings for repairs covered by extended warranties was just $837, while the average cost for coverage was $1,214, resulting in a net loss of $377. So even if you use the coverage, the savings may not come close to covering the cost.
Question #4: Who backs the warranty?
An extended warranty may be backed by the manufacturer, the dealer, or an independent company, so find out who will perform or pay for repairs. Lauderdale says warranties from the manufacturer may be a bit more expensive than those from a third party, but they may provide better coverage. “They usually cover a very wide range of repairs and allow you to go to any authorized dealership to handle repairs,” Lauderdale says.
Also, know what happens if the company backing the warranty goes out of business. An administrator may handle a service contract sold by the dealership. If the administrator goes out of business, is the dealer is still responsible for performing repairs? If the dealership goes out of business, will the manufacturer honor the service contract?
Question #5: Will you use it?
It may seem inconceivable that someone would pay for an extended warranty and then neglect to use it, but that’s exactly what a majority of buyers do. In the Consumer Reports survey, 55 percent of car buyers who purchased an extended warranty didn’t use it.
Some buyers find that using the extended warranty simply isn’t worth the hassle. Depending on the terms of your contract, you may have to schedule repairs with the original dealer or with an authorized repair center in the region. If you buy your car from a dealership in another town, the car breaks down on a road trip, or you move after you buy the car, bringing the car back for covered repairs may be inconvenient.
Question #6: How will you pay for it?
The cost of the service contract is typically based on the car’s make, model, coverage and length. Costs can range from one to several thousand dollars. Consumer Reports found that among people who purchased an extended warranty, 86 percent bought theirs at the time they bought the car. It’s easy to roll the cost of a service contract into your car loan, but that convenience could cost you.
When the cost of the extended warranty is added to your financing, you’ll pay interest on the extended warranty for the life of your loan. Financing a $1,200 warranty over five years at an interest rate of 4.21 percent will cost you an additional $132.82. That may not seem like much when you’re financing thousands of dollars for a new car, but it’s another factor to consider when you’re deciding whether an extended warranty is worth the cost.
The bottom line
Despite the cautions and statistics, some car buyers just like the peace of mind an extended warranty brings. Before you buy, make sure you read the fine print so you know what’s covered, what isn’t, and what hoops you’ll need to jump through to get your repairs covered.
And finally, know yourself. If you’re not likely to follow the terms of the agreement, you may be better off setting up a savings account designated for car repairs. If you face major repairs, you’ll have the money available. If your car is reliable, you can always use the money for a down payment on the next one.