No one enjoys car breakdowns and unexpected repair costs, and many people purchase extended warranties to avoid these financial headaches. An extended warranty is an insurance policy covering the cost of repairing a vehicle (or other product) if it stops working correctly, within a specified time period.
Cost Versus Benefit
Extended warranties cost extra, and buying one is entirely optional. They offer protection against the cost of unexpected repairs, but can be themselves quite expensive. A review of extended auto warranties done by Consumer Reports in 2013 revealed that most car owners paid more for the warranty itself than the cost of the repairs they needed during the warranty period. The Federal Trade Commission (FTC) also cautions that extended warranties do not make financial sense for many people.
Regular Warranties and Extended Warranties
When you buy a new car, the manufacturer provides a warranty for parts and labor on repairs due to manufacturing defects. This warranty typically lasts for three to four years or 36,000 to 50,000 miles. Many car manufacturers also offer roadside assistance as part of their standard warranty.
Extended warranties are offered for sale by auto manufacturers, car dealerships, auto clubs, and private insurance businesses. Many extended warranties for new cars provide protection for five years or more, and up to 70,000 miles. However, these plans typically cost between $1,000 and $2,000, and most new car buyers only have a few hundred dollars in repairs during the warranty period.
Used cars might come with an extended warranty if the previous owner purchased a transferable warranty. However, not all extended warranties can be transferred to someone else. You can buy an extended warranty for a used car at a dealership or from a private vendor, but it is worth analyzing the benefits before buying one.
Questions to Ask Before Buying an Extended Auto Warranty
Before you buy an extended warranty for a new or used car, consider these questions:
It the vehicle already covered by a manufacturer’s warranty? If so, an extended warranty may be duplicate coverage.
What is the age and condition of the vehicle and how much annual mileage are you expecting? Extended warranties make more sense for older cars driven for longer distances.
How long is the extended warranty period? Consider how much in repair costs you are likely to have during that time frame.
Precisely what is covered by the warranty? Many extended warranties exclude specific types of repair.
Are there restrictions on who can do repair work? You may be restricted to repairs at a dealership.
Do any of your credit cards already offer some of the protections in the extended warranty plan? Again, you may be doubling up your coverage.
Does the vendor offering the warranty have a history of complaints with the Better Business Bureau (BBB) or on websites like Angie’s List?
If you do buy an extended warranty for a new or used car, read the contract carefully before you sign it. An alternative to purchasing an extended warranty is to put the money in a savings account for future car repairs. Then, if you do not need all of the funds for repairs, you have not lost any money.