Weighing the Costs of Extended Warranties

March 23, 2016

 

 So you’re buying a new car (or at least new to you). You and the salesman have agreed on a price, and you’re excited to finally get your hands on the keys. But before you can drive your new ride off the dealer lot, you’ve got to hunker down in the Financing & Insurance office to sign a small mountain of paperwork. Chances are sometime during this process the F&I manager will offer you an extended warranty. Having not thought about this part of the deal, you’re not sure what to do. Is it a good deal? Can you afford the extra cost? Can you afford to forgo it?

Whether or not an extended warranty is worth it will depend on your particular financial situation as well as the age and type of car you’re purchasing, but there are a few things to think about before sitting in the F&I office with a pen in your hand. For instance, if you only plan on keeping the car for a few years before moving on to something else, you’re probably going to want to pass on the warranty. If the car you’re purchasing is new, in most cases the manufacturer will warrant the vehicle for at least three years or 36,000 miles. If the vehicle is used or you plan on keeping it until flying cars become a reality, you’ll likely give more thought to signing an extended service contract. However, it’s important to remember you don’t have to make a decision on the spot.

Not all warranties are created equal. In fact, they come in a variety of lengths as well as scopes of coverage. Some have deductibles, others don’t. Be sure to read the fine print before scribbling your John Hancock. Is the warranty transferable? What does it take to void the warranty?

Warranty Types

There are few basic types of car warranties. First is the previously mentioned original manufacturer warranty, which likely covers just about everything that could need repair in a car’s first few years of life. You’ll likely still be on the hook for things like tires, batteries, brake pads and other wear items, however. Most dealerships will usually sell you is what’s known as an aftermarket or extended warranty. As the name implies, this warranty extends the length of the manufacturer’s coverage for a specified amount of time and generally covers a similar range of potential fixes (though many aren’t quite as comprehensive). There are also powertrain only warranties that will cover the vehicle’s engine, transmission, and other power transmitting parts like CV joints, differentials and driveshaft. Finally, there are more narrowly focused warranties covering things like rust and corrosion or emissions.

Extended Warranty

Since the extended warranty is the one most likely to be offered up with a new or used car purchase, that’s where we’ll focus on from here. After the all important “How much?” when considering an extended warranty, your next question should be, “Who’s backing it?” Some extended warranties come straight from the vehicle’s manufacturer and are basically just extra time on the original warranty. Others, however, can come from third parties that are less than reputable. There are also a number of well-known aftermarket warranty suppliers, some backed by respected financial institutions, who are more trustworthy. It’s important to do your research and know which suppliers you’d be interested in purchasing a warranty from and which you’d rather avoid. There’s information available online, including owner reviews, so take advantage.

You can also purchase a warranty at a later date, especially if you had to get creative in paying for the car itself. Bear in mind, though, the price may go up significantly after the fact.

Certified Pre-Owned (CPO)

If you’re shopping for a used vehicle and a warranty would increase your peace of mind, you may want to take a look at certified pre-owned vehicles. Most large car dealerships offer CPOs, which often have several advantages over other used cars. For one thing, in most cases, to be listed as certified pre-owned a car must pass a thorough inspection, which means you can generally be assured it’s in good shape. Also, CPOs often include a warranty of some sort and may qualify for other additional warranties not available on their non-certified cousins. Of course, you’ll likely pay a premium for a CPO versus a similar uncertified vehicle.

Crunching the Numbers

Deciding whether an extended warranty makes sense involves doing some math and making an educated guess as to what will save you the most money over the course of your car’s life. You could buy a warranty and never need it or, or you could not buy one and suffer a catastrophic failure. There’s just no way of knowing. Researching the type of car you’re considering will give you a good idea of what issues are common to that particular make, model and year and how much those problems are likely to cost. Compare a few best and worst case scenarios against the cost of the warranty.

Even in some close to worst-case scenarios, the warranty might cost you more in the end than it saves you in repair costs. But for some buyers the ability to roll the cost of the warranty into their auto loan may be an important way to avoid the financial disruption of an unexpected major repair bill. In the end, what you’re really paying for in a warranty is peace of mind. How much that’s worth will likely be each individual’s deciding factor.

 The above article was written by David Burbach and was published in the Fall 2015 edition of Go Drive Magazine