• Do You Need an Extended Warranty or Not?

  • Auto Loans Advice & Articles

    One question that often comes up when buying a new car is the need for an extended warranty. A recent article in Consumer Reports concludes that extended warranties aren't worth buying. Researchers found that most people did not use the coverage, and for those who did, the cost of the warranty often exceeded the savings it created. However, if you were one of those who was saved the cost of a very expensive covered repair, you'd probably be glad you purchased the warranty.

    But extended warranties are expensive...

    Yes, they are. In fact, consumer advocate Dave Ramsey says that about half of what you'd pay for an extended warranty pays the commission to the dealership selling it to you. And most dealers try to entice you into buying one by tacking it on to the price of the car and financing it. The actual price of the warranty gets bundled in with your car payment, so you don't think about it.

    The Federal Trade Commission (FTC) recommends careful consideration before purchasing one of these. Find out how likely to covered parts are to break, what is and isn't covered, and how claims are handled. The more reliable the car you purchase, the less likely you are to use a warranty. The FTC also recommends avoiding companies that cold call car buyers about this coverage because many of them are sketchy.

    Extended warranties cover everything, right?

    Wrong. Just like every type of insurance, extended warranties are loaded with fine print and legalese. Therefore, it's very important for you to read and understand what it does and doesn't cover. Look for a list of exclusions from your warranty provider, which will help you to understand what types of things are not covered by your extended warranty -- for example, damage from an accident.

    Keep in mind too, that repairs must be approved. Suppose a mechanic takes apart your engine to find the problem, only to have the repair denied by the warranty provider. If you want your engine put back together, guess who pays for it? That's right, you do. And the problem still isn't fixed, again, unless you pay for it.

    And you can go anywhere for repairs, right?

    Wrong again, well, maybe. If you have an extended car warranty from the manufacturer, you may have a wider selection of repair facilities. However, if you went with a third-party warranty, you likely have a list of approved repair shops where you can go to get repairs. Be sure to check how this type of thing might effect you if you're on a road trip in another part of the country. Would you still be able to get repairs done? That's a good question to ask before buying the warranty.

    Okay, so why would you want an extended warranty?

    Instead of buying a warranty, some experts recommend opening up a savings account and depositing what you would have spent for the warranty, earmarking it for car-related expenses if they come up. But that may not be enough if you have a catalytic catastrophe or an engine explosion.

    Newer vehicles have a lot of costly technology. When you have problems with these things, it can get very expensive to fix (for example, the average price of a "check engine" repair is about $400). If you don't have an extended car warranty that covers these technology systems, you can end up paying a lot of money out-of-pocket for repairs. An extended warranty is your insurance policy against having to pay out-of-pocket for that rainy day when your car's computer system completely fails. But if you're like the majority of people (according to Consumer Reports), that day may never come.

    Image by Herb Neufeld used under CC license