If you’ve purchased a used car from a dealership in the past few years, you’ve undoubtedly encountered the extended warranty option. To be clear, while most of these are described by the salesmen as warranties, most are actually service contracts. A warranty is built into the price of the vehicle, whereas a service contract costs extra and is purchased in addition to the vehicle itself. A warranty and service contract both generally achieve the same goal, just keep in mind that if you have to purchase it on top of the vehicle itself, it’s probably a service contract.
On the surface, the added protection of covering your vehicle for an extended amount of time seems like a good idea, but before you jump in, make sure you understand what you’re getting yourself into. These are products that are pushed because they make money for the dealer and salesperson. There are times when buying the service contract can be a great idea and save you money, but there are plenty of situations where it is completely unnecessary and will just end up costing you money. And worst of all, there are actually some companies that are little more than scams.
Consider Your Situation First
Before you decide on whether or not you could use an extended warranty or service contract, consider your situation. First, does the vehicle you’re intending to buy have an existing manufacturer’s warranty that will carry over to you? If so, how many miles or years are left before it expires? Many auto manufacturers are including longer warranties that in most cases are transferable. So, if you’re buying a car with a 70,000 mile existing warranty and it has 15,000 miles on it when you plan on buying it, that’s entirely different than buying the same car with 65,000 miles on it. In the first scenario, buying the extended warranty would be a bad idea with so much life left in the existing warranty, whereas the second scenario might point to an opportunity.
Consider the Cost
To be blunt, many of these service contracts are expensive. That doesn’t automatically mean they are all a rip off, but you do need to consider the likelihood of needing repairs, what those repairs would cost, and then determine if it makes sense. Depending on a number of factors such as what is covered (i.e. is it comprehensive, or just powertrain?), the deductible, and the length of contract, prices can vary from just a couple hundred dollars to a couple thousand dollars.
What you’re ultimately doing is placing a bet that you think your repair costs over the length of the contract will be more than you paid for the contract itself. For instance, if you paid $800 for coverage that will last you about two years, you have to ask yourself if there is a good chance that over the course of those two years you’ll need to have $800 or more worth of work done. If it isn’t very likely, you might as well save your money. But if you think that is clearly a possibility, it might make sense. It’s like buying insurance. You never know if you’re going to need it, and if you don’t use it, it feels like wasted money. But if you do need it, you’re sure glad you have it.
Other Benefits to Consider
Another thing to consider with these types of service contracts or warranties are the possible other benefits. Many will offer a free loaner car when you have to bring your vehicle in for service. That can be extremely helpful if you’re in a situation where you need a car or don’t have many options for sharing a ride. Some may also pay for the cost of a rental car as well. So, if you’re in the shop for a few days, this can be a nice benefit to have.
In addition to getting a spare car when yours is in for repairs, some contracts also provide free towing service in the event you break down. While this isn’t as big of a concern if you have AAA or some sort of roadside assistance, if you don’t have these, it can be a fantastic benefit. Again, it’s something you hope to never have to use, but if you do, you’ll be thankful you have it.
Dealership Repairs vs. Mechanic
One thing you need to consider is the cost difference between dealership repairs vs. having your local mechanic handle it. Obviously, the dealership is going to charge more for parts and labor. It’s what they do. And if you buy a service contract, that generally means you have to take it to the dealer, or at least an approved location in order to have the work covered. Of course, if you have the coverage, you’re not paying for it out of pocket, so you don’t think much of it.
But, that’s where you have to decide if it’s really a value or not. If you’re shelling out money for additional coverage, what would happen if you took your vehicle in to a local mechanic instead? You would have to pay out of pocket, but since you’d be paying less for the same repairs, it still might end up cheaper than buying the service contract to begin with.
My Personal Experience
I’ll give you an example with a personal experience I’ve had with used cars and service contracts. We have two used vehicles. In one case, it was clear that buying additional coverage would be a waste. With the other, it was a little bit harder of a decision. With the second car, it had 23,000 miles, and the manufacturer’s warranty only went to 30,000. Since I would be the one driving and I put on around 18,000 miles a year, the prospect of running out of coverage after just three months from the purchase was the first indication we might want to consider adding coverage.
Then we had to decide what type of coverage we wanted. Just powertrain coverage, or something more comprehensive that covered everything from a broken door latch to the electrical system. Looking back at my scenario, I do a lot of driving, on rough roads, and harsh winters. The chances are pretty good that there will be more than a couple repairs needed over the coming years, so comprehensive was looking like a better option, but that all depends on price.
After all said and done, we were able to get a 100,000 mile service contract for $1,500 with a $50 deductible. Sound expensive? Yep. But, that’s where you have to decide whether or not you think you’ll need $1,500 or more in repairs over the course of 77,000 miles, or in my case, a little over four years. If you’ve ever had to pay for car repairs out of your own pocket, you know just how fast things can add up. So, I felt it was a pretty safe bet given the situation.
Sure enough, after about 8 months, we had a problem with the transmission. Total bill? Around $1,200. A year later, a few more problems developed. The radio wasn’t working right, the seat didn’t recline properly, and just a few other little misc. problems. Another $500. And just a few weeks ago, took it in for a terrible clicking problem with the master relay, a rapidly deteriorating wheel bearing, a leaking axle seal, and a leaking exhaust manifold, for another $1,800.
Now, that $1,500 + $150 in deductibles doesn’t look so bad considering the $3,500 in repairs, and the loaner car for about the 10 total days it’s been in the shop. Could the work have been done cheaper than that by taking it somewhere other than a dealer? Probably. But I also would have been in a situation where I would have had to rent a car, and a small shop may have required more time to get the repairs done. Of course, we could have been “lucky” and the car could have never had any problems, and it would have felt like throwing money away. You just never know.
You have to be very careful. Any dealer is going to try and sell you one of these. They will make it sound like a great deal, but it’s up to you to do the research to determine whether or not it’s really worth it. I’d say that for most people, given the cost, these warranties or service contracts aren’t going to be worth it. But, if you do the math and find out that it could be beneficial, then it might be worth considering. But don’t let the salesman bully you into a contract.
A better option for most people would be to set aside a “vehicle fund” to work as your own extended warranty. If you put $1,000 or $2,000 into a high-yield savings, I really like Ally Bank, and sort of earmark that for unexpected vehicle repairs, your money can actually earn interest while it’s there and ready in the event you need it. While you might miss out on some of the added benefits of buying coverage, you’re in better shape if you’re fortunate enough to have a car that doesn’t need any, or only minor repairs.
The bottom line? Generally, these are unnecessary and costly. In some cases, if your situation warrants it and the price is right, it can be worthwhile. Just make sure you know what you need, how much it will cost, and what you’ll actually get out of it before rushing into a decision. And most of all, read all of the fine print! Make sure you know what’s covered, what isn’t covered, and what all of the limitations are. This is where a lot of inexpensive contracts snag you. They offer a good price, but you find that a lot of stuff isn’t really covered and you really are just throwing money away.
If you are looking at buying a car right now be sure to read up on things you should know before buying your next car and mistakes to avoid making before buying your next car.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
Before making decisions to purchase an extended warranty you need to be very sure that the product really needs an extended warranty. Check out the product's reputation in the past. How frequently it needs repairs and how frequently do the components of the entity need replacement. This will surely help you in getting a fair idea of the cost that you are going to spend on the extended warranty and the real amount you need to pay in case you decide to repair or replace the parts without an extended warranty.
Cars articles are mostly crap and marketing stuff but this one is no doubt a very good read I recommend it to be shared on social networks so other should also get the benefit.
I purchased a 2007 Mazda CX7 with 40K two and a half years ago from a private party and due to it being the first model year I opted for the extended warranty option with a zero deductible from my credit union. At around 50K an oxygen sensor went out which was covered. At 80k the timing chain failed which required engine replacement, after showing maint. records, engine was replaced under warranty. Less than a month later while having brakes replaced, they noticed a problem with the lower control arm and ball joint. Again, repairs were fully covered with nothing out of pocket to me. This was the best $1400 I ever invested! And there's still about 20K/2yrs remaining...
OKay we bought the car with 66,000 on it and purchased the extended warrenty because of the batteries would cost alot to replace now I am wondering does the warrenty depreciate after you buy it so that later they wont have to pay the total amount
I just purchased a 2009 cadillac cts 4 wd w/ 21000 mi. Car fax reported no reported breakdowns and only regular service appts kept and car in good standing with no problems. I turned in a chevt malibu that i bought new 2008 but with only 12500 miles. Theyre trying hard to sell me an extended warenty that will not be in my budget. Its not by the mile its by the year and i dont use the car daily. As you can see i put 12,500 in 3 years! Also they want a 100 dollar deduct. Because its a used car they r urging me to make this additional purchase. Should I trust theCarFacts? It drives nice, no indicatio that the car was abused in any way and the owner had it 4 3 years with no apparent problems?? What should I do?????
Please someone tell me which company that provide reasonable extended warraty WITH free car loan and free towing service. I just bought a used car last week.
I appreciate your help. Huongtruong
sometimes they can be good, but other times they are not so good. Sometimes the aftermarket warranty compaies won't honor problems poeple are having with the the car
I bought a Jeep which only had 53000kms on it and took out an extended warranty,(thank God)the first lot of repairs within 8 months were nearly $600 The second lot of repairs were $680 and now it has buggard up again and has to be towed and I need a car. Thankfully everything is covered under this warranty including the towing and hire car. So in this instance taking out the extended warranty has nearly paid for itself and there is still 12 months left on the warranty. Jeeps are a great car to drive, but the cost of repairs and labour at Dealerships is way over the top, so if your'e buying an imported vehicle the extended warramty is a good way to go
I consider it as $2000 well spent
I purchased an extended auto warranty from http://www.noriskrepairs.com a few weeks later, my water pump went out on my Chevy Sivlerado and I didn't pay anything but my $50 deductible!
I bought the used car extended warranty because I live in a remote area and the warranty appeared to cover costs of getting the vehicle to an approved repairer and travel expenses. The nearest dealer is over 500km away. I did read the fine print but, of course, I'm not a mechanic or a lawyer. I could not even find out why the warning lights were on until I had transported the car (which was still in good working order) at my own expense 500 km away. Then I was stuck with a $1000+ repair bill, a car 500km away and the situation of having to take time off work to go get it. Did the Allianz warranty cover any of it? Of course not, waste of money.
Very good information as I have a extended warranty I purchased on my 2007 chrysler convertable. I haven't had to use as yet but I plan to keep car and decided to have the warranty available when needed. The comment I would like to make is the car dealers make every effort for you to purchase a extended warranty when buying a new car. Keep in mind that if you decide to do that your going to be paying on the warranty as long as you have your loan. So you need to keep that in mind that your paying interest on the money your financing for the warranty. I think you better off waiting until your a couple months away from the original warranty expiring then finding a good warranty.
yOUR INFORMATION IS GREAT,WELL NEEDED, i MY SELF JUST BOUGHT A 1995 xjs cONV. jAGUAR WITH 40,000 IT IS USED MAINLY FOR SHOWS, sOME COMPANYS WILL NOT INSURE IT OTHER WILL AT A $4000,$5500 RANGE, i HAVE GONE THROUGH LIKE 20 COMPANYS, AND WOUNDER IS THAT PRICE WITH IT FOR WHAT I AM USING IT FOR. THANKS J mARKS
Thank you for that insight. That leaves us with a great way to evaluate our situation before jumping into any warranties.
I need to purchase an extended service contract. Which company offered the 1500/50? Two companies that sent me postcards have numerous complaints filed against them with the BBB. I don't want to be scammed.
Which company did you get the 1500/ 50 deductible with? Already decided I need one, just want to find a company thats not a scammer...
i echo reading the fine print. also, not all are created equal and i would buy only if it was a manufacturer's extended warranty rather than third party despite being sold through the dealer. deciphering between manufacturer extended and third party is difficult since the dealer sometimes sell both.
for us, we bought manufacturer extended nationwide warranty (i was shocked they had a difference between nationwide versus local for manufacturer extended warranty), because we were not driving the car for 2 years (we had someone drive it once a week over the time period overseas), so it made sense for us to get extended warranty covering during the period 4-6yr period we would be driving the vehicle rather than the 2-4yr period we weren't driving the vehicle. if that makes sense.
It's also a good idea to do some research on the car and it's repair history. Ask a disinterested mechanic about that model. Many times vehicles will be different on the outside only (meaning the chassis, engine, and transmission are the same from model to model). Armed with that information, you might be able to make a better decision. I had a friend who purchased a Range Rover despite knowing it was notorious for breakdowns. Another friend all but INSISTED he buy the extended warranty for it and that warranty probably saved him over $10,000 in repairs.
Moral of the story: do some research before you fall in love with the car.
A transmission is a finicky thing. Just those costs alone seem to always warrant an extended warranty (no pun intended). It all depends on what you're using the car for and how many miles are one it.
The point on Dealer perks, such as loaner cars, etc. is also a great point. Once, I had the engine go out on a used car (no warranty). It was replaced and went out again. Had to shell out $777 for a month long rental.
great points. knowing the details and reading the fine line is critical. here's a post we did a while back on extended warranties and other dealer add-ons and what you should watch out for...
It is better to earmark some funds for car repairs rather than opt for an expensive extended warranty.
Again, I have to re-iterate what you said. Read the fine print, all of it, black and white, front and back.
I used to work at a company that sold extended service contracts for cars, and when they had a repair, that we denied, and they come back with the "well the dealer told us it was bumper to bumper", i always referred them back to their service contract, and pointed out exactly why they weren't covered. They threatened to sue us, but the contract is a signed document, and generally they would not win.
I don't work there anymore, hated it the whole time I was there, but the one thing I did learn was to read the fine print...
@Car Warranties Unless you have limited funds like many working americans and live paycheck to paycheck, then that warranty may come in handy. Putting money away "in case" is all fine and good but when you put money away for kids college, money away for retirement, money away for this and that and now money put away for a car repair that may not happen, what do you have left to live on? Me? I got nothing and with atrocious child support that I pay, there is nothing to put away. Analyze your own situation and go with what works for you.