My wife and I purchased a used vehicle a few months ago (I am now among the legions of mini-van drivers, but I’ll save that story for another day!). We did plenty of research to narrow down which make and model to purchase, and we decided to go with a Factory Certified used vehicle because they offer a factory warranty for a limited period of time. We also had the opportunity to purchase an extended warranty, which is offered by just about every dealership when you buy a new or used vehicle. And that brings us to the following question:
Are Extended Car Warranties Worth The Expense?
When you purchase a car or truck, the purchase price is only the beginning of the long list of expenses associated with car ownership. Auto insurance, scheduled maintenance, and repairs can quickly make a significant impact on your budget. Because of these maintenance costs, many car owners question whether adding an an extended warranty is a cost effective move.
The answer can vary depending on the condition of your vehicle as well as the type of extended warranty you buy. In some instances an extended warranty can save a car owner hundreds if not thousands of dollars. On the other hand, the wrong policy could end up being a complete waste of money. Let’s take a look at some of the options available to car buyers.
What is an extended car warranty?
An extended car warranty is actually a service contract that can be purchased when you buy your vehicle or at a later date. This contract is basically an insurance policy for your vehicle which covers expenses that occur while the warranty is in effect. As a general rule, extended car warranties cover certain repairs and maintenance expenses that arise within the agreed upon period of time or mileage limits.
What to look for in an extended car warranty
An extended car warranty can be worthless if a car owner purchases a warranty that does not provide the needed coverage. It is important to read and understand the contract before signing on the dotted line. Find out to what extent your vehicle will be covered and if the time period of the warranty matches how long you anticipate owning the vehicle. If you plan on keeping the car for several years after the factory warranty expires, an extended warranty should cover anticipated repairs and maintenance. You should also consider the type of vehicle for which you are buying coverage. The age, condition and overall reliability of your vehicle will help determine if a car warranty is cost effective.
Your expenses. Find out in advance how much you will be responsible for paying out-of-pocket (deductible) before the warranty kicks in. Some warranties have a small deductible, around $50-100, while others may have a co-pay arrangement, where you might pay a deductible, plus a percentage of the repair cost. You will need to determine the upfront cost as well as potential ongoing costs to determine if it might be worth it. Here is an example of an extended warranty being worth the cost.
Where can repairs be performed? Some extended warranties cover maintenance performed at any factory dealership, and some extended warranties only cover repairs performed in select repair shops. An extended warranty which only authorizes repairs in a few select shops is may not be as good as a warranty that covers repairs at any factory dealership. If you are restricted to specific repair shops your extended warranty will be of little value if you find yourself needing repairs and are unable to get your car to the required shop.
Financial strength of the underwriter. Finally, extended car warranties which are underwritten by a company of questionable financial strength may be inexpensive to purchase, however car owners run the risk of not having the much needed coverage when the time arises.
Do your research. If you decide an extended car warranty is something you are interested in, take the time to research several different companies before making a commitment. You can compare the prices and warranty terms of several different companies online to narrow your choices and get a ballpark idea of how much it will end up costing.
Pros and Cons of an extended car warranty
Pros. The obvious benefit of purchasing an extended car warranty is the peace of mind in knowing unexpected expenses will be covered with minimal out-of-pocket costs for the car owner. The cost of car repairs can be very expensive, potentially making a quality extended warranty a cost effective option.
Cons. Some extended car warranties are of little value due to the limitations of the warranty. Carefully read all associated paperwork before purchasing the extended warranty.
Should you buy an extended car warranty?
This is a personal decision and one that my wife and I declined. We bought the factory certified pre-owned vehicle so we could have the benefit of an extended factory warranty for an additional year. During that time period we won’t have to pay for any repairs to our van. In the mean time, we set up a personal accrual account, which we have an automatic deposit sent to each month. This will work as our vehicle emergency fund. (Read How to Open a Capital One 360 Sub Account for more information on setting up a targeted savings account).
But just because we declined the offer doesn’t mean you should. Be sure to run the numbers for your situation – including the vehicle age, mileage, overall condition, reliability, how long you plan on owning the vehicle, and potential extended warranty costs.