Should You Buy an Extended Warranty for Your Car?

Extended Warranties Bring Peace of Mind -- but They Aren't Always a Good Deal

Car shopping
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Today, most new cars come with an extensive bumper-to-bumper warranty that covers nearly every part on the car for at least 3 years or 36,000 miles. Many cars carry additional "powertrain" warranties that cover the engine, transmission, and the bits that make the wheels go around. Car dealers and third-party companies offer extended warranties that extend coverage for a longer period of time. Are extended warranties a good deal? Read on.

Is an extended warranty really necessary?

As a general rule, I'm opposed to extended warranties. Most offer limited coverage and many do not cover the items that are most likely to break. Even if an item is covered, a dishonest warranty company will find reasons to delay or avoid paying claims. Some extended warranties have deductibles, while others limit your choice of repair shops. Besides, improvements in both build quality and materials technologies mean that today's cars are more reliable than ever.

Many car buyers purchase an extended warranty out of fear that their car will need expensive repairs just after the factory warranty expires -- a scenario that, while possible, isn't very likely. If you're concerned about this happening, you'd be better off purchasing a car with a proven track record for longevity and build quality. Consumer Reports is a good place to start -- their reliability ratings are based on long-term real-world data from actual owners. If the car of your dreams has a reputation for poor quality or expensive repairs, an extended warranty might not be a bad idea.

Extended warranty shopping tips

If you're going to buy an extended warranty, take the time to shop around and find the best coverage and the best price. Remember, you do not need to purchase your extended warranty from the dealership. If your dealer tells you that you cannot obtain financing without buying an extended warranty or that you can only buy an extended warranty when you purchase the car, it's time to find a new dealer. The truth is that you can buy an extended warranty at any time, even after the factory warranty has expired, although the price will usually go up as the car gets older.

While dealerships offer the convenience of rolling the price of the warranty into your car payment, many dealers offer third-party warranties that offer the best profits, not the best coverage. Most automakers offer factory-backed extended warranties which have the advantage of guaranteed acceptance at most of their dealerships. They also have added incentive to provide good customer service. However, these "factory-backed" warranties tend to be more expensive, and prices can vary from dealership to dealership.

Several third-party warranty companies sell directly online, but it's important to do your research as some companies are more reputable than others. Look for companies that offer low per-visit (as opposed to per-repair) deductibles, money-back guarantees, and that allow you to view the contract online before you purchase.

Before you buy any extended warranty...

An extended warranty should not be a rush purchase! Before buying any extended warranty, read the contract carefully. Be sure you understand what is and what is not covered, where you can have your car repaired, and whether there are any deductibles or limits on your coverage. If you're not car-savvy, review the exclusion list (the list of what isn't covered) with a trustworthy mechanic. Don't base your purchase decision on a sales brochure -- make sure you see the actual contract. If the company you are dealing with won't supply a copy of the contract, don't buy their warranty.

An alternative to extended warranties

One alternative to an extended warranty is to keep your own repair fund. Open an interest-bearing bank account or CD and deposit $50 per month for the duration of your new car's bumper-to-bumper warranty. When the warranty expires, bump up your deposits to $75 per month. Most cars don't generate big repair bills until they are at least seven years old, and by that time you'll have well over $5,000 in your repair fund and no worries about deductibles, coverage limitations, or denied claims. Best yet, if you never need to dip into your repair fund, you'll have a healthy down payment for your next new car. -- Aaron Gold