By definition, a warranty is a guarantee that comes with a purchased product at no additional charge, and most new cars come with a three-year or 36,000 mile warranty. When the dealership tries to sell you the "extended warranty," what they are actually offering is a long-term service contract, and you will see these names used interchangeably. Extended service contracts are high-profit products for dealerships, but that doesn't necessarily mean they are poor values for you.
When a dealership offers you an extended warranty for $900, for example, it is betting that your covered repairs during the term of the contract will remain under $900. If you buy the contract, you are covering your bets in case the repairs exceed $900.
There are several companies, besides your automobile dealership, that offer extended warranties for your vehicle:
Determining the Need for an Extended Service Contract
Whether a warranty is a good value, depends on the answers to several questions:
- How reliable is the car you plan to purchase? Consumer Reports, J. D. Power and Associates and Edmunds all offer well-researched reliability ratings, which can help you estimate future maintenance costs.
- Exactly what is covered? Look for a warranty that covers electrical, wiring, power train, parts failure, leakage, cracked head and block, in addition to the cost of a rental car while yours is in the shop. If the contract also covers normal wear and tear, consider that a bonus. Also, look for a low or no deductible warranty. Before signing on the dotted line, read the contract carefully, and ask a mechanic to explain any exclusions or features you don't understand.
- What are the requirements to keep the warranty in force? Some warranties become void if you do not have recommended maintenance performed. Be sure you understand the required maintenance schedule, where the maintenance must be performed and any associated costs.
- Is your car already under warranty? Ideally you want to avoid paying for duplicate coverage, but it may not be possible. If your car comes with a 36,000 mile warranty, and you are purchasing a 100,000 mile warranty, attempt to negotiate for a partial rebate or ask the dealer to add miles to the warranty. Sometimes you can wait for the original warranty to expire before purchasing an extended service contract. In any case, it never is a bad move to ask the question, "Is that your best price?"
- Who stands behind the warranty? Sometimes you may purchase an extended service contract directly from your car's manufacturer and avoid paying the dealership's mark-up. A web-site visit could save you hundreds.
- How long do you expect to drive your car? The longer you keep your car, the more likely it is to need repairs. If you trade cars every three to five years, the standard manufacturer's warranty may be all you need.
- Under what conditions will you drive your car? If you drive predominantly in the city, or in heavy traffic, your car is more likely to need repairs than if you drive at higher speeds on open roads.
- How badly to you need your car? If you bike to work or own a second car, having something go wrong with your car may be an inconvenience. If you are a sales representative who constantly drives to visit customers, car trouble can put you out of work.
- Can the warranty be transferred? If you decide to sell your car, having a transferable warranty will make it more attractive to a prospective buyer.
Consider purchasing a low-mileage certified used car with an extended warranty already in place. These cars have already been inspected and repaired, and you get the benefit of the warranty someone else has already purchased.