The Pros and Cons of Extended Warranties

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Article QuickTakes:

• Coverage later on | Exclusions and limitations
• Save on repairs | Costs more later
• Your car may last longer | Many people never use them

Years after the original warranties are gone, extended car warranties provide protection for consumers. Also known as service contracts, they are a popular plan offered by manufacturers and third parties. But are they right for all? We shall explore the pros and cons of extended warranties to assist you in making an informed decision.

Extended Warranty Essentials

An extended car warranty is a consumer contract usually purchased when a vehicle is new. These contracts vary widely in price and usually come with several levels of protection. Exclusions apply and additional out-of-pocket costs are possible. Extended warranties are offered by the vehicle manufacturer as well as by third parties.

Pros and Cons of Extended Warranties

As with any service contract, there are benefits and drawbacks worth exploring.

Pro: Extended Warranties Offer Coverage Years After the Original Warranties Expire

What drives consumers to purchase an extended car warranty? For some, it is a robocall that warns them that their original car warranty has expired. Those calls, though, should be avoided as the majority are not legitimate, but they do serve as reminders that all warranties must eventually come to a close.

Without any type of coverage left on a vehicle, including bumper-to-bumper, powertrain, and hybrid coverage, consumers may feel vulnerable to expensive repairs. This is especially so if a particular manufacturer's vehicles have a less-than-stellar reliability history. Without a solid track record, a vehicle could begin experiencing major repairs in about five years or just after the original warranties expire.

Full coverage, though, usually begins once the New Vehicle Limited (bumper-to-bumper) warranty ends or after the powertrain warranty ends. That is anywhere from three to five years afterward, occasionally longer. For manufacturers, the service contract may align closely to the original warranty, while third-party providers simply offer features that provide an elevated level of protection. The length of these contracts differs but keeping coverage in place for as long as you are making loan payments makes sense. Go no further than that if you have a strong idea that you will sell your car as soon as the loan is paid off.

Con: Exclusions and Limitations are Unavoidable

With several levels of protection available, depending on the price paid, consumers may find coverage that varies widely too. Nearly every plan requires an upfront deposit with monthly payments following. Moreover, plans do not kick in immediately, including for high-mileage and older vehicles. Typically, a wait time of 30 days and 1,000 miles is the minimum, possibly longer. This makes sense as consumers might game the plan with immediate repair claims.

There are also two types of coverage plans. The first one is a "named-component" as it covers only specifically named parts. The second one is "exclusionary," and this means nearly all components are covered with the excluded parts spelled out.

Deductibles are another concern, although manufacturer-backed plans usually do not have them. For third-party providers, deductibles range from $50 to a few hundred dollars. Some deductibles are "per visit" while others are "per repair." If the latter, you may end up paying a deductible for each part repaired, even if it is on the same day.

Just as there are exclusions, there are also limitations. The most common limitation is the contract length. Once it has expired, you must purchase a new one to cover repairs moving forward. Expect a higher rate and the usual exclusions and restrictions to apply.

Pro: You Can Save on Expensive Repairs

Repairing or replacing a transmission or an engine will cost thousands of dollars. Without a service contract in place, you may be faced with a difficult decision: repairing or replacing your current vehicle.

With the right kind of service contract, the repairs will be covered minus any deductible. Even if the deductible on a transmission is as high as $500, the other $3,000 or more to fix it would be paid by the contract.

Con: They Are More Expensive When Purchased Later

Certainly, service contracts are not inexpensive. The average cost is $2,500 with prices fluctuating widely based on coverage levels, the manufacturer and model of the vehicle, model year, and mileage.

The best prices, though, are when the vehicle is new. In addition, with a few miles on the odometer, you will command a top deal.

For new cars, the service contract will not kick in for several years, usually near the time the original warranty expires. This means you are paying upfront for a contract that does not officially cover your vehicle until later. Notably, service providers can afford to give you a competitive rate now while you are not submitting claims.

On the other hand, if you wait to purchase an extended warranty, your cost will be based partially on the miles accumulated per your odometer. During that time, the service provider may notice a repair pattern emerge for the vehicle, even if it is still under the manufacturer's warranty. By then, the cost to purchase a warranty will have risen, perhaps considerably. Furthermore, like any warranty, the service provider calculates risk and prices the contracts accordingly.

Pro: Your Vehicle May Last Longer

You may take excellent care of your vehicle by following the manufacturer's maintenance guidelines precisely. As listed in the owner's manual, those guidelines are designed to keep your vehicle running for numerous years.

But as vehicles age, major components begin to wear out. The engine and transmission are the top expenses, but other repairs involving airbags, the suspension system, camshaft, head gasket, and catalytic converter can set you back by thousands of dollars. If these repairs are covered under your plan, you should be able to keep your car on the road longer.

An older vehicle in fine working order has several advantages to it, including stable maintenance and repair costs, lower auto insurance rates, and lower property taxes in states that charge them. Moreover, you can also plow those savings into a savings account earmarked for your next new vehicle.

Con: Most Consumers Rarely Use Them

How likely are you to use an extended warranty? In a 2014 article, Consumer Reports noted that 55% of consumers who had purchased a service contract never used it. At that time, the average cost for such plans was $1,200 and has climbed steadily since.

Instead of pouring money into a plan you may never use, setting aside cash for future repairs is a reasonable approach. Also, without a warranty in place, you may find it is easier to release it. With an active warranty in place, the majority of these are transferable, although a transfer fee must typically be paid.

Shopping for an Extended Car Warranty

Now that you know the pros and cons of extended warranties, you have the information needed to make an informed decision. We recommend checking online reviews as well as Better Business Bureau reports to narrow your list of companies to compare. In addition, your state's Office of the Attorney General or Consumer Affairs department are other places to research. In some states extended car warranties are treated as insurance plans, therefore the Insurance Commissioner oversees them.

Finally, if you choose an extended car warranty, most can be canceled by the consumer. Keep this option in mind if you decide later to sell the vehicle or find that it is more cost-effective to maintain a repair savings account instead.