Buying a new car can be a joyous event. Before you leave the dealership, however, you'll find yourself in the finance office with a pitch for an extended warranty. Before you sign up, consider some expert advice.
"Extended warranties, offered at the time of buying a vehicle are opportunities for the dealer to make up lost profits," said Ron Montoya, Consumer Advice Editor for Edmunds. "They kick in after the original warranty expires and are for a pre-determined length of time. Some have co-pays while others have everything included in the price. Whether somebody should buy one depends on their comfort level."
How They Work
More of an insurance policy than warranty, extended coverage is designed to keep auto owners from paying large out-of-pocket expenses. Not all are created equal.
"There are different types of extended warranties," said Joe Wiesenfelder, Executive Editor for Cars.com. "Only on new product are extended warranties offered by the manufacturer, although certified pre-owned vehicles can be an exception. The rest are not warranties as much as service contracts for used cars. Basic maintenance, tires, brakes, clutches, and rotating tires are usually not included. Sometimes, the warranties end at a certain mileage. Research the heck out of it."
It is important to know what type of warranty you are buying. Break-down warranties only cover parts that fail unexpectedly while wear-and-tear warranties cover parts that wear out through use. Some warranties do not cover expensive electronics like the ABS computer or stability control system. Contracts can be voided if you do not perform required maintenance. Read the fine print.
Experts agree that you should choose warranties backed by manufacturers and not third parties. Factory-backed warranties can be used at dealers nationwide while third-party plans usually have to be exercised by the dealer who sold it or at other designated service centers. What happens if you move or are traveling? These warranties often require the holder to pay for repairs out-of-pocket and then apply for reimbursement.
"Third-party service contracts may be offered by dealers as an agent of the issuer. They provide some level of service in case of repairs, but are usually focused on major components like the engine or transmission," said Wiesenfelder.
Always perform due diligence and search the provider online. It is also worth a visit to the Better Business Bureau (BBB) web site. Never be pressured by telemarketers and do not give personal information until you authenticate the provider.
When To Buy
Before buying, ask yourself how long you plan to own the vehicle. If it will be gone before the factory warranty expires, forget it. Most brands provide at least 3-year/36,000-mile bumper-to-bumper coverage while some like Hyundai and Kia offer 10-year/100,000-mile powertrain warranties. Buying a warranty extension may seem like a smart idea, but the facts could bear another conclusion.
According to a Consumer Reports survey, 65% of respondents spent significantly more for the extended coverage than they reaped in repair savings. Twelve percent noted they had difficulty getting warranty repairs because of contract terms or disagreements with an administrator. CR recommends you put the $1,500-$2,300 you might spend in a money market fund and "insure" yourself.
Don't be afraid. You will likely be shown the "price" for expensive repairs like an air-conditioning compressor, transmission, or engine. Practically, an A/C compressor is less than the cost of many of these warranties and it is rare for an engine or transmission to fail before extremely high mileage. There is always risk, but think about your own history. How often have the repairs for which you're buying a warranty actually occurred?
Several years ago, there was a significant difference in the reliability ratings between foreign and domestic brands. While that gap has virtually closed, it is a good idea to do your research.
"It is wise to look up reliability ratings of any brand or model you are considering," continued Wiesenfelder. "I'm personally more comfortable with brands like Honda than Saab. Nobody lives in a vacuum – you will pay more to warrant luxury cars or those known to have problems."
New cars are more reliable and built better than ever, but it is a good idea to review sources like Consumer Reports or J.D. Power & Associates for their ratings. Edmunds.com has reliability information in its used cars section.
The Best Price
There is more flexibility in prices than you might think. Dealers have considerable mark-ups on the contracts – as much as 50%. To cover themselves and make the most profit, a dealer will likely recommend the highest level of coverage. If you don't need it, don't buy it; choose a lower level of coverage and save money. Because dealers are likely only paying 50% of the quoted cost, there's room to negotiate.
"It's really important to know what's covered," said Montoya. "You don't want to be surprised when you pay out-of-pocket. Shop for the best prices. The warranties can cost from $800 to $2,000 depending on the type of car and coverage purchased. Some are pro-rated with money back at the end if you do not use it. I recommend consumers take time, drive their car, and shop around. Get price quotes and have the extension waiting when their original warranty ends."
Although it is convenient because you can roll the cost into your monthly payments, you do not typically have to buy the extended warranty up-front. It can be purchased any time during the factory warranty period.
Consider some additional points. Consumer Reports recommends that you negotiate the most coverage you can afford with a $100 deductible, not exceeding 2% of the vehicle price per year. Examine that deductible closely to determine whether it is per visit or per repair; multiple issues can add up. Some warranties are transferrable, meaning they can be good selling points when re-selling the vehicle.
In the end, most buy extended warranties for peace of mind. If you won't sleep tonight without buying one, then do it. Enter the realm with your eyes open and don't over-extend your warranty.
The basics of extended warranties
•2 types: Factory-backed and 3rd party. When possible, choose the former over the latter.
•Basic maintenance items like tires, brakes, clutches and belts usually not included.
•Pay-back is questionable. 65% spend more on warranty than it returns. Consider investing in a money market account instead.
•Do not succumb to telemarketers and fear tactics.
•Negotiate - dealers have big mark-ups.
•Research your vehicle's reliability ratings in Consumer Reports, Edmunds, JD Power & Associates, and similar publications.
•Visit the Better Business Bureau web site to check the provider before buying.
•Expect to pay $800-$2,500, depending on vehicle and level of coverage.
•Read the fine print.
•Enjoy our peace of mind.Copyright © 2015, CT Now