Pros and Cons of an Extended Warranty

  • By Lea Naiz
  • 26 Jun, 2017

An extended warranty, also known as an extended service contract, are presented as a way to  financially protect yourself from expensive car repair bills. Like insurance, you must pay for the extended warranty (typically monthly included in your car payment) whether you use it or not. Most contracts include a deductible. At first glance an extended warranty contract may look enticing but best practice is to investigate and educate. You are well-advised to have your attorney review the contract – even if you pay your attorney $300 to advise you it is money well-spent. There are good extended warranty providers and some that are not so good. The not so good providers put so many limitations and stipulations in the contract that it is not worth the money you pay for it.

Like any optional insurance coverage, extended warranties have quite a few pros and cons.

Do you need extended warranty?

Pros

  1. Fixed Costs (sort of):   when you roll the cost of an extended warranty into your monthly car payment it can be “set and forget”. However see below.
  2. Customizability:   Many car manufacturers offer extremely long warranties on the powertrain, but much shorter bumper to bumper warranties. You can choose an extended warranty that only provides the coverage you need. Likewise, you can add such extras as rental car coverage that may not be provided by the manufacturer.
  3. Used Car Coverage:   Most pre-owned cars are sold either as-is or with a very limited 3-month warranty. Many extended warranty providers allow you to cover any car you own, even if you are not the first owner, provided that it is below a certain mileage limit (often 100,000 or higher). This mitigates one of the biggest risks of buying a used car—your lack of knowledge as to how well it was maintained. Extended warranty providers generally expect you to keep maintenance records from the time of purchase, but many will cover a used car even if you do not have the previous owner’s records.
  4. Rebate Of Unused Portions:   We have seen some extended warranties that state they will rebate any unused amount at the end of the term. I have never had opportunity to discuss this with someone that’s actually received a rebate. A rebate of this nature would definitely help control costs at the back end of the warranty period.

Cons

  1. Expense:   Most modern cars are built to last well over 200,000 miles, as long as they are properly maintained. Extended warranties do not cover basic maintenance items, so you will still be on the hook for oil changes, tires, and other “wear” items in addition to the cost of the warranty. It is entirely possible that you will pay much more for an extended warranty than the warranty will ever pay out. If you have a solid savings account with enough available cash to cover unexpected repairs, you might be better off without the extended warranty.
  2. Manufacturer Warranties:   If you are the type of car owner who likes to switch out vehicles every few years, and you only buy new, you might never go out of the manufacturer’s warranty period. In this case, an extended warranty would be unnecessary.
  3. Exclusions:   Not all extended warranties are the same, so it is absolutely essential to review your contract before signing.. Ask for the exclusions list, and review it with your mechanic before you make a decision.
  4. Repair Facility Limitations:   Some extended warranties cover repairs by any licensed mechanic. Some cover dealerships nationwide. And some only cover a specific list of auto repair shops in a specific part of the country. If you like to take road trips, be sure that you will be covered wherever you go.
  5. Maintenance Record Keeping:   If you always have your vehicle serviced at an auto repair shop, the record keeping requirements of an extended warranty are easy. However, if your uncle Joe is a shade tree mechanic without a license, and he does most of your maintenance, you might run into difficulty when you file a claim. Make sure you understand exactly what records are required, and how to log them, before buying the extended warranty.
  6. Obligations:   It is common to have obligations for proper maintenance of various systems in your car to keep your warranty in force.Proper vehicle care is a great idea and will save your money over the long haul but you need to be aware of and understand your obligations per the contract to prevent voiding your warranty or any portion thereof.

Facts

  1. The seller of an extended warranty contract takes a commision that’s included in the price of the warranty. This is not unethical in fact everyone on has a right to “earn” money but the fact remains that the seller’s commission adds cost to the bottom line.
  2. The price of the warranty contract “may” be negotiable. I have seen two clients  with the same warranty provider and the same coverage (contract) where one paid $3800 and the other paid $2600 – you be the judge.
  3. Warranty providers are in business to make money – again nothing wrong with that. However when there is a claim the warranty providers are very good at controlling their costs (enter restrictions and stipulations). It is common to end up paying for certain items that are specifically excluded in addition to your deductible.
  4. If you roll extended warranty coverage into your car loan you are paying interest on the warranty portion which adds to its overall cost.
  5. There are a few warranty providers that make the process easy and pleasant.

The Bottom Line

The smartest financial decision is to create a savings account dedicated to car care. Once you are able to save $5000 or more dollars in an account dedicated to maintaining and repairing your vehicle you now have a buffer zone, this is a great way to reduce the stress of car care. Another great benefit of this tactic is once the money is saved – It’s still yours if you don’t have to use it for an unexpected repair bill. You haven’t had to pay it out to a warranty company nor are you paying interest on the face value of the warranty contract.

There is no right answer to the question of an extended warranty, only whether it makes sense for you. Consider your budget, your car buying habits, your maintenance choices, your road trips, and your ability to absorb a pricey repair bill. If you do choose to buy an extended warranty, read the fine print carefully and pay your attorney to help you understand the contract and your obligations.

If you are tired of getting the runaround and being treated like you haven’t got a clue, we invite you to try   Colchin Automotive   instead. Give us a call at 303-431-5421 for all of your automotive needs!

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