Extended Warranties – Are they worth the cost?

Q: I am in the process of buying a new set of wheels, and I’m being pushed to take out an extended warranty plan on my car.  Is this a good idea?

A: The process of buying a car involves lots of decisions, each of which should be considered carefully.  We have answered all your questions regarding extended warranties.

What is an extended warranty?

Every new car comes with a limited warranty, covering the first 36,000 miles driven on the car or the first three years of ownership; whichever comes first.  An extended warranty offers the owner extra coverage for a longer period of time or for more mileage.   “Warranty” in this context is really a misnomer; the product is more of an insurance policy that protects against most repairs.

Are extended warranties worth the price?

In most cases, extended warranties are not worth the cost.

Extended warranties will add $1,000-$3,000 to the total cost of your car.  In most cases, you’ll never see that money again.  According to the most recent survey on the subject by Consumer Reports, more than half of car owners with extended warranty plans paid more for their coverage than they received in payouts.  In short, extended warranties are created to benefit the seller and, the consumer.

Personal finance expert Dave Ramsey is famously outspoken against extended warranties.

“On average,” he says, “you’ll pay about $1,500 on an extended warranty, and the average repair is $180. I don’t recommend ever buying extended warranties.  If you can’t afford a $200 repair on a car, then you can’t afford the car.”

When should I consider purchasing a warranty?

There is a time and place for everything – even pricey extended warranty plans. If the vehicle you are purchasing is notoriously unreliable and prone to breakdowns, you may want to consider taking out an extended warranty.

Before you sign on the dotted line, though, carefully read through the contract. Your plan should offer the most extensive coverage possible. It is best to take out an exclusion warranty, which provides the broadest coverage and will pay for everything except specifically mentioned repairs.

Another major factor to consider when purchasing an extended warranty is the reputation of the company behind the policy.  Do a quick online search on the company and ask for references.  Make sure the company is a nationally recognized enterprise and has a strong online presence, as lots of smaller, unknown companies can give you a very hard time when you try to make a claim.

Is there anything else I need to know about extended warranties?

There are several factors about extended warranties that are often overlooked by consumers.

First, most extended warranty plans offer limited protection. They may exclude any repairs that are necessary from “wear and tear” on the vehicle, or they may have a policy to only offer coverage if the car breaks down completely. They may also specify that you only get your vehicle serviced by the dealership where you first bought your car or by their designated mechanic.  These places might be overpriced or offer inferior service.

Second, like any insurance policy, most extended warranty plans have deductibles that must be paid before coverage kicks in. While paying a deductible is standard, some of these plans have a deductible on every repair. This can be borderline ridiculous if you find yourself paying a $100 deductible for every $200 repair you need for the lifetime of your policy.

Finally, ask if your extended warranty is transferable.  A few years down the line, when the manufacturer’s warranty ends and your extended warranty kicks in, you may decide to gift your car to your teenager.  Will you be able to transfer the policy to your child’s name? Find out now before you are stuck paying for something you can’t even use.

Are there any alternatives to extended warranties?

If you like the idea of having prolonged coverage, but you do not like the steep price tag of extended warranties, you can still enjoy a stress-free car ownership by following these simple steps:

  1. Choose a car that has a great record. Carefully research the vehicle you are purchasing before finalizing the deal.
  2. Follow the manufacturer’s maintenance schedule.  It is a schedule designed by the manufacturer to help you avoid major repairs on your vehicle by catching small problems before they turn into big ones.
  3. Open a savings account to save a little every month for repairs.  Then you will be ready when necessary repairs occur.

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