Should I Buy an Extended Warranty?

By Matt Keegan
Last Updated 08/21/2015

You spent days, perhaps weeks performing research on buying a new or used car. You carried out due diligence to learn everything you could about a particular model, including arranging test drives, obtaining quotes from multiple dealers and perhaps securing financing on your own. Thousands of dollars in savings mean you received a great deal on a new car.

That deal, however, wasn't the only matter discussed. Indeed, after successfully concluding your negotiation with the sales representative, the car dealer's business manager invited you to his office to discuss certain after sale options, particularly an extended warranty plan. Such plans cover the cost of repairs on your vehicle beyond the standard warranty and are designed to give customers the assurance that they'll never be hit with a catastrophic repair bill.

Extended warranties on new cars are sometimes overpriced and may not cover all your expenses, especially when certain exceptions or limitations are taken into consideration. We'll explore what an extended warranty has to offer and whether such plans are worth it.

Extended Warranty Plans

An extended warranty plan is designed to kick in at a point during your vehicle's ownership. These plans typically pick up where the manufacturer's warranty ends, but occasionally they overlap by months or by mileage or with both.

Extended warranties are essentially service contracts, which cover the cost of specifically outlined repairs on your vehicle should something go wrong. As such, these service plans are often offered by third-party providers, not the vehicle manufacturer. Keeping that point in mind, there is always the possibility that the provider could go bankrupt, which would mean that your extended warranty may die with the company. If you prefer an extended warranty, ensure that it is the manufacturer's plan you are purchasing.

When reviewing an extended warranty, you should understand what is covered and what is not. For instance, the warranty may require you to have your car serviced only by the dealership where you purchased the car. In certain cases it may allow you to visit another dealer, but it may not allow you to take your car to an independent repair shop. Furthermore, if labor costs are not covered you might pay more through your dealer than if the work was handled by your local garage.

In addition, there are deductibles to consider when evaluating an extended warranty. In certain cases the deductible applies per visit. But with other warranties the deductible is for each repair. With the latter, you may find yourself charged $200 to flush the radiator and replace the hoses ($100 deductible, per repair). Notably, there are warranties offering no deductibles, but these plans usually come at a higher cost.

Besides knowing precisely what is covered by your extended warranty, you should be aware that there are also limitations or exceptions. For instance, some parts may only be covered if the vehicle breaks down. That could mean that any parts that wear out due to "wear and tear" may be excluded. Then again, there are upgraded and costlier warranty plans that also cover a wear and tear provision.

Another point to consider is whether the extended warranty is transferable. You may decide after a few years to give the car to your son or daughter, only to learn that the extended warranty does not transfer. Only opt for an extended warranty that can be transferred when you sell the car.

Extended Warranty Cautions

Extended warranty plans are not cheap and may add $1,000, $3,000 or more to the price of your vehicle. If you are financing the car through the dealership, the warranty cost will be added to your final price. This also means you are paying interest for the extended warranty and will continue to do so until the loan is paid off. Your state's sales tax may also increase to reflect the warranty purchase.

Independent research about extended warranties reveals that such plans are not a beneficial deal. In 2013, the Consumer Reports National Research Center conducted a survey and found that 55 percent of the people who bought an extended warranty never used it during the lifetime of the policy. The center also found that people who purchased such plans spent more for the coverage than what they received from the plan. Specifically, Consumer Reports found that purchasers spent an average of $1,214 on extended warranty plans, but only saved $837 on repairs. That's a net loss of $377 for those who used their extended warranties.

Extended Warranty Alternatives

Instead of investing too much money for an extended warranty plan that may not pay off, consumers should consider other ways to ensure peace of mind.

First, only choose a model that has a superior repair record. Stay away from a vehicle that has a spotty repair history or likely will face a surge in repairs several years out. Even if you do choose an extended warranty, consider the inconvenience of having a car sitting in the shop awaiting repairs.

Second, follow the manufacturer's maintenance schedule. If you care for your car according to the manufacturer's maintenance schedule found in your owner's manual, then you're likely to avoid significant repairs.

Third, you can set up a car fund. Establish a savings account dedicated exclusively for the care of your car. If you ever face major repair costs, then tap the account. Unused funds can then be applied toward a down payment on your next new car.