What is an extended auto warranty?
“The term ‘extended warranty’ is actually a misnomer since it isn’t really a warranty at all. An extended warranty is actually an insurance policy on your vehicle, a safeguard against expensive, unforeseen repairs,” writes Edmunds.
The Federal Trade Commission further explains that extended warranties are more accurately known as service contracts, and a “service contract is a promise to perform (or pay for) certain repairs or services.”
You’ll hear the term “extended warranty” when you buy a car at a dealership. While this term isn’t 100% accurate, we’re going to stick with it in this article since it’s the term you’re most likely to hear when buying a car. Auto warranties can also be called vehicle service agreements or extended service agreements.
Remember that extended warranties typically aren’t required to qualify for an auto loan. “If the dealer tells you that you have to buy a service contract to qualify for financing, contact the lender to find out if this is true,” recommends the Federal Trade Commission.
Pros of extended auto warranties
- They come with perks. Some extended car warranties come with extra benefits that are unrelated to car repairs, like car rental discounts, towing, and lost-key or lockout service.
- They can be transferred to new vehicle owners. If you’re trying to boost the resale value of your car and give buyers an incentive to act, look no further than an extended auto warranty! Auto warranties can sometimes be transferred to new owners. A warranty can give the buyer peace of mind and may encourage them to choose you over another private party seller.
- They can protect your budget. Major breakdowns always happen when you (and your budget) least expect it. They’re pricey, too. For example, your car’s transmission, air conditioner, and fuel system are all essential systems that could cost over $1,000 each to repair. Depending on your auto warranty, you could have parts like these repaired for just the cost of your deductible.
If these benefits align with your wants and needs, then an extended car warranty might be worth it for you.
Cons of extended auto warranties
- They don’t cover any and all repairs. As Thelen Volkswagen notes, some things aren’t covered by extended warranties. These are known as “wear-items,” which are usually parts that need to be replaced over time due to normal wear and tear, like tires, shocks, and brake pads. Ask to review the warranty “exclusion list” before signing on the dotted line to clearly see what is and isn’t covered.
- Covered repairs aren’t free. An extended car warranty comes with a deductible, similar to your auto and health insurance policies. A deductible is the amount of money you pay up-front, out of your own pocket, for vehicle repairs before your warranty kicks in. Warranty deductibles can range from $50 to $200.
- You could be restricted to certain repair shops. If Bubba Bumps Auto Repair is your go-to shop for any and all car repairs, check that you can still take your car there for repairs through the extended warranty. Some warranties restrict where you can go. If you move to a new city, there’s a chance that you won’t live near any approved repair shops. At that point, your extended auto warranty is practically worthless.
If these drawbacks resonate with you, then an extended car warranty might NOT be in your best interest.
Is an extended car warranty worth it for you?
According to the North Carolina Consumers Council, “It still holds true today like it did ten years ago that most people either don’t use extended warranties once they get them, don’t save as much money as the plan costs, or don’t have a repair expensive enough to meet the deductible. The truth is that most people today still probably don’t need an extended warranty.”
Similarly, a Consumer Reports survey found that 55% of people who bought extended warranties never used them. Those who did use them got reimbursed an average of $837 for necessary repairs vs. the average of over $1,200 paid for the extended warranty.
Investing in an extended car warranty is a decision you’ll have to make for yourself. Whether you ever use it or not, an insurance policy (like an auto warranty) comes with peace of mind. For some drivers, that peace of mind is priceless.
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