Monday, May 30, 2011

Should I Buy An Extended Warranty?

“Should I buy an extended warranty?” on my new or used car is one of the most common questions I get asked. Extended warranties are also referred to as extended service contracts. This article is how I answer this frequent question.

An extended warranty is simply a warranty that kicks in after the manufacturer’s warranty expires. But, extended warranties are never as comprehensive as the manufacturers’. A manufacturer’s warranty on a new car is about as close to a “bumper to bumper” warranty as you can get. However, even a l manufacturer’s warranty is not truly bumper to bumper because the tires are never included. The tire warranty is offered by the tire manufacturer A extended warranty is far from a complete bumper to bumper warranty but many car salesmen and finance managers will say their extended warranty is bumper to bumper…this is not true.

When the dealer (or anyone else) tries to sell you an extended warranty they will focus on all of the things that the warranty covers, but typically avoid telling you those items the warranty doesn’t cover. My first piece of advice is to determine exactly what is not covered by this warranty. Today’s automobile contains more computer hardware and software than it took to put a man on the moon. Computer modules are very expensive to replace and are usually not covered by extended warranties. Navigation systems are very expensive and usually not covered. Sometimes some or all of the air-conditioning system is not covered and this is another very expensive item to repair and replace. The more expensive a part of your car is to fix or replace, the less likely it is to be covered by the extended warranty.

All extended warranties cover the power train which consists of the engine lower block, drive shaft, and rear axle. It essentially covers the parts lubricated by your engine oil. These components rarely ever fail and, if they do, it’s caused by lack of maintenance or abuse, in which case the warranty won’t cover the repairs anyway. You’ll see a lot of dealers advertising a“free lifetime warranty” with every car they sell. These are power train warranties and they are free because they are virtually worthless.

If you decide to buy an extended warranty, be sure you know the company that stands behind the warranty. Check out the company’s financial stability. It’s not uncommon for warranty companies to go broke and you’re stuck with a worthless warranty. Many manufacturers offer extended warranties and these are generally safer bets than independent companies. If the dealer is selling his own warranty, be sure that he is financially strong and that you don’t have to bring your car back to the dealer anytime you have a repair covered by the warranty. You should have the right to have your car repaired by any service department in North America.

If you ever receive a solicitation to buy an extended warranty in the mail, by email, or by telephone ignore it. Ninety-nine percent of these are scams. The warranties are overpriced and cover virtually nothing that might need repairs, usually just a power train warranty. The companies offering them are likely to be gone when you try to make a claim. These companies (many seem to be based in Las Vegas) buy mailing and email lists from the various states’ departments of motor vehicles. They know your name, address, when you bought your car and the make and model from this data. They know when your car will be out of the manufacturer’s warranty by how long you’ve owned it. A lot of these solicitations appear to be coming from the manufacturer, but manufacturers never solicit their owners for extended warranties. The envelope and letters are made to look very official and threatening giving you only a few days to act before it’s too late.

I still haven’t answered your question about whether or not you should buy an extended warranty. You know to be very careful about which warranty and who you buy it from. I look at an extended warranty just like I look at an insurance policy. In fact, we’re lucky in Florida because automotive extended warranties are regulated by the state insurance commission. The rates are approved and registered with the state. In most states, the dealer can charge anything he can get for an extended warranty. In Florida you can also cancel an extended warranty you haven’t used anytime in the first 60 days. My philosophy is to buy insurance on something that I either couldn’t afford to fix or replace or if it would put a financial hardship on me if I did. I carry fire and flood insurance on my home based of this philosophy. I don’t buy an extended warranty on my iPhone because I can afford to buy another one of mine broke. I also recommend you consider buying an extended warranty if it will bring you “piece of mind”. This varies based on the personality of each individual. Whatever you decide, just remember that most insurance companies make lots of money. This is because they always take in a lot more money in premiums than they pay out in claims. When you buy an insurance policy, you’re betting against the house and in the long run you will always lose. But if you got peace of mind because you protected yourself against a loss that would have severely tapped your financial recourses, it’s worth it.


  1. With the state of the art technology today making them would be easier.
    I would suggest this to other manufacturers.

  2. You're absolutely right - the biggest thing to worry about is whether you can "trust" your coverage or not. Case in point, there's a warranty outfit up here in Canada that's offering coverages through insurance brokerages - High Road Warranty ( I haven't bought one, but I'd be more inclined to think a broker is a trustworthy place to buy that kind of coverage.


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