What Your Car Salesman Doesn’t Want You to Know About Extended Warranties

5,020 Views
What Your Car Salesman Doesn’t Want You to Know About Extended Warranties
AleksandarNakic

You’re at the dealership when the slick salesman asks a question you’re not prepared for: Would you like to add an extended warranty to your car purchase?

And you panic. You know you’ve read something about them before but can’t remember. Are they a scam? Or a necessity? You really wish you’d done some Googling beforehand.

It all comes down to one question: Are extended warranties worth it?

Here’s the honest truth.

How Do Extended Warranties Work?

First, let’s establish what an extended warranty is -- and is not.

You might be surprised to learn it’s actually not a warranty at all -- a more apt description would be “service contract.”

While “a warranty comes with a new car and is included in the purchase price,” explains the FTC, “a service contract may be arranged at any time and always costs extra.”

Manufacturer’s warranties come with new cars and typically last at least three years or 36,000 miles -- whichever comes first. On the other hand, extended warranties, or service contracts, usually don’t come into play until after your manufacturer’s warranty expires.

Extended warranty plans vary in duration and coverage: Some offer bumper-to-bumper coverage, while others only cover repairs to certain parts of the car.

But be warned: “Common repairs for parts like brakes and clutches generally are not included,” says the FTC.

Before purchasing any extended warranty, it’s essential you ask:

  • What’s covered? What’s not covered?
  • Who backs the warranty?
  • How much is the deductible?
  • Do I have to pay upfront for repairs? If so, how long will I have to wait for reimbursement?

You should also find out whether the extended warranty’s coverage (either time period or problems) overlaps with that of your manufacturer’s warranty -- because you definitely want to avoid paying for two plans that do the same thing.

What an Extended Warranty Costs You

Although the cost of extended warranties depends on the type of car you buy, along with the level and length of coverage you need, a recent Consumer Reports survey found the median price for coverage was $1,214.

On top of that, you’ll probably need to pay a deductible for repairs -- either on a per-visit or per-repair basis.

The difference is important, as this example from the FTC illustrates: “Assume you have a $100 deductible and your car needs three parts repaired. With the deductible per visit, you pay $100. If you have a deductible per repair, you pay $300.”

If you decide to purchase an extended warranty, don’t forget to negotiate. According to Consumer Reports, people who haggled saved an average of $325.

One other factor that affects price is whether you buy your extended warranty from the dealership or a third party.

I’d recommend going with the dealership -- not only because the price is conveniently rolled into your monthly payment (albeit with interest), but also because third parties are notoriously shady.

Whatever you do, ignore letters or phone calls from companies warning you that your warranty has expired -- and offering to extend it. They’re probably scams.

One woman who signed up for an extended warranty after seeing a TV commercial told Angie’s List: "Every time I'd call them for a claim, they denied it. They came up with one reason or another. I finally quit paying them.”

Should You Buy an Extended Warranty?

From my research, it doesn’t seem like extended warranties are worth it.

Need proof? Of those who purchased an extended warranty, 55% never even used it, according to that Consumer Reports survey. And for those who did, the savings only amounted to $837 -- an overall loss of $375, considering the median purchase price of $1,214.

Oh, and Consumer Reports also notes “satisfaction with auto­mobile extended warranties is among the lower rated of all products and services” it ever surveys -- with only about a quarter of respondents saying they’d definitely get it again.

So what should you do instead? Put the money you would’ve spent on an extended warranty into a savings account, suggests Consumer Reports.

“That way, you’ll have an emergency fund if a post-warranty problem arises. And if your car doesn’t need pricey repairs, you’ll already have the money for a down payment on your next car.”

Or, if you want to be a true Penny Hoarder, buy a used car instead.

Your Turn: Have you ever purchased an extended warranty? Was it worth it?

Susan Shain is a freelance writer and digital nomad. She covers travel, food and personal finance (basically, how to save money so you can travel more and eat more). Visit her blog at susanshain.com, or say hi on Twitter @susan_shain.