Auto Warranty
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What is an extended car warranty?
An extended car warranty, also known as a vehicle service contract, is an optional insurance policy you can purchase to cover certain vehicle components and repair costs. The policy supplements or replaces the warranty coverage provided by the car’s manufacturer.
Extended car warranties do not cover all repairs or parts but may cover mechanical and electrical components that the factory warranty does not while omitting others that the manufacturer covers.
How Does An Extended Car Warranty Work?
An extended warranty is actually similar to an insurance policy that protects against costly, unexpected repair expenses. Extended warranties cover repairs for a specific period of time and miles, as stated in the contract. In exchange for the coverage specified in the contract, you generally make a small monthly payment toward your contract.
Extended Warranty Claims
If your vehicle experiences a problem that is covered in your contract, you can take it to a repair facility or a dealership to have it inspected and file a claim with the warranty company, which will reimburse you or pay the mechanic directly for your covered repair expenses, minus deductible costs. Depending on your contract, you may have to use a dealership, or you might be able to use your favorite repair facility.
Extended Warranty Providers
There are two types of providers that offer and administer extended car warranties: automakers (often referred to a manufacturer or original equipment manufacturer) and third party companies. While we discuss the difference in more detail in later sections, here is a brief description of each provider type:
- Manufacturer (OEM): An original equipment manufacturer (or OEM) is an automaker (for example Chevrolet, Mercedes, Toyota etc.) Manufacturer-backed warranties are typically sold by dealerships, which package extended warranty coverage with the sale of a vehicle. Though there generally more limitations regarding vehicle eligibility, covered repairs for manufacturer warranties are usually done at dealerships by factory-trained technicians, who use factory certified parts.
- Third-Party Providers: Third-party extended warranty providers are independent companies that administer extended warranties. Third-party warranty providers could include insurance companies, banks, lenders, or companies that specialize in vehicle service contracts. Warranties from third-party providers generally are more flexible with regards to vehicle and repair shop eligibility, coverage limitations, and payments.
Types of Extended Car Warranties
Extended car warranties, those sold by third-party vendors as opposed to original equipment manufacturers, often feature the following coverage tiers or levels:
- Powertrain. Powertrain warranties cover parts that generate and transmit power, including the engine, transmission and axles. This is often the least expensive coverage tier since, while the covered components can be expensive to repair, they are limited in number and fail relatively rarely.
- Powertrain Plus. This includes basic powertrain coverage, plus some added coverage or components which vary per company.
- Bumper-to-bumper. Bumper-to-bumper warranties offer the most comprehensive coverage and are therefore the most expensive. Most such plans include the vehicle’s major mechanical systems, except for specifically excluded items. These exclusions generally include “wear and tear” items such as brake pads or tires, for example.
- Named component including emissions. A named-component contract covers a specific list of components. For example, it may cover your vehicle’s GPS and electrical system but nothing else. There are also typically separate warranty terms for emission components such as catalytic converters, which may run for more months and miles than even the powertrain warranty — especially for cars bought in California.
What Does An Extended Car Warranty Cover?
What an extended car warranty covers depends on your specific contract. Generally, covered parts can include the powertrain (engine, transmission, drive axles) alternator, electrical systems, air conditioning, safety components, water pump, and more. Read your contract’s fine print to figure out exactly what’s covered and what’s not.
Vehicle Service Contracts
There are two types of vehicle service contracts: exclusionary and inclusionary. Each type of contract provides a different form of coverage, which we describe in more detail below:
- Exclusionary contracts: This type of extended warranty covers all parts of your vehicle from mechanical breakdown due to normal driving activities, except for a short list of excluded parts and components.
- Inclusionary contracts: Inclusionary (also stated component, named component, listed component) coverage, is essentially the opposite of exclusionary coverage. Your contract will have a list of the parts and systems that are covered, and any unlisted parts are not covered.
Extended Warranty Exclusions
Extended warranties don’t cover everything. Usually, extended car warranties only cover repairs and components that break down as the result of normal use. Certain items are not covered under any circumstance, meaning if you are covered by an extended warranty and file a claim for a repair that is on the list of exclusions, your claim can be denied. Below is a list of common exclusions:
- Environmental damages
- Wear-and-tear components (tires, brake pads, wiper blades, and shock absorbers)
- Issues caused by theft or vandalism
- Improper maintenance
- Vehicle misuse or abuse
- Damage from accidents
- Routine maintenance needs such as oil changes
- Non-mechanical parts (bumpers, glass, trim, and upholstery)
How Much Does An Extended Car Warranty Cost?
Because no two cars are exactly the same (or at least used in the same way), the cost of an extended car warranty depends on a number of factors:
- Existing coverage. An extended car warranty can be considerably cheaper if your car is still covered by the original factory warranty when you request a quote.
- Coverage type. More comprehensive coverage plans such as bumper-to-bumper and exclusionary plans will often cost more than basic powertrain protection plans.
- Coverage length. Because cars tend to need more repairs as time goes on and their mileage goes up, a longer-lasting contract will often cost more than a short-term one.
- Vehicle type. Older cars and vehicles with high mileage are likely to need more frequent repairs than a new vehicle. An extended car warranty for a car that needs more frequent repairs will have a higher premium overall.
- Deductible. Your deductible is the amount of money you need to pay before your coverage kicks in. As a general rule, the lower your deductible is, the higher your monthly payment will be and vice versa.
- Provider. Different providers will charge different prices for similar products. Keep in mind that you get what you pay for and a cheaper product may have less favorable contract terms.
Pros and Cons of an Extended Auto Warranty
The advantages of an extended auto warranty include:
- Savings on out-of-pocket repair costs: If you purchase an extended warranty, you won’t have to worry about unexpectedly needing to pay for a costly, covered repair, which can provide financial security.
- Robust, extended protection: Service contracts typically cover costs not covered by factory warranties or outside the warranty period. If your otherwise-reliable car suddenly has a hiccup a few years into ownership, you may be covered for the expense of repairing it.
- Purchasing flexibility: As optional add-ons, service contracts don’t have to be bought at the time you buy a car and generally aren’t required even if you’re getting a loan, which allows you the time to make a considered decision.
The drawbacks of an extended auto warranty include:
- Added expense: The upfront and deductible costs described earlier can add up to a lot of money on top of insurance costs and the price of the vehicle itself, which could put you in a budget crunch.
- Use it or lose it: Extended auto warranties act like insurance policies, meaning that if no repairs to your car are needed, there’s no tangible benefit.
- Only pays for covered expenses: The repairs that your car may eventually need may not be covered by the service contract or may already be covered by a manufacturer’s warranty. Coverage limits may also apply.
When Might an Extended Warranty Be a Good Idea?
Buying an extended warranty might make sense if:
- You can’t afford a major car repair. Adding a bit more to your monthly car payment may be worth it to you if the cost of a car repair would be financially devastating. Look for a comprehensive warranty from a reputable seller and make sure you understand any actions that could cause denial of coverage.
- You drive your cars into the ground. If you’ll get a new vehicle before the current car’s factory warranty expires, an extended warranty will just duplicate coverage. Those who keep their cars for years are more likely to benefit from extended warranties.
- You’re a high-mileage driver. Road warriors who will quickly exceed the 60,000- or 100,000-mile factory warranty coverage on their vehicles may want extended warranty coverage.
It’s generally best not to buy an extended warranty at the time you buy a car, since you won’t use it for several years. Wait until the manufacturer’s warranty is nearing expiration or the deadline to purchase coverage is approaching.
How to Choose An Extended Car Warranty
Extended car warranties are sold both by dealerships or manufacturers and third-party vendors — the latter being the kind of plans we’ve reviewed here.
If you receive a plan quote from the dealership, you don’t need to accept it immediately. Instead, postpone the decision while you shop around for warranties from third-party vendors as well. Take advantage of the fact that many of these vendors offer free quotes for comparison purposes.
Here are some things you can do as you shop around for the best coverage:
- Compare plans. Compare plans by not only their monthly costs but also the terms and exclusions of the warranty agreement. That includes noting the range of deductible you can elect to pay. Also ask how increasing your deductible may affect the premiums you pay, since a higher deductible tends to lower those costs — and will still deliver a substantial amount in the event of more serious repairs.
- Check when the plan kicks in. Check when the plan kicks in, and how that compares with any remaining coverage from the carmaker’s factory warranty – which may last for many years, particularly on certain major components. As noted above, resist buying a plan if the manufacturer’s coverage still applies, since you would be duplicating coverage you already have until the factory warranty elapses.
- Do a side-by-side coverage comparison. Review prospective plans side-by-side for the car components they cover — and don’t cover — and the extent of coverage. Note, too, how the warranty company stipulates you must maintain the car, and the paperwork required to prove that you’ve done so, since some plans may be stricter than others in that regard.
Finally, don’t rule out negotiating over the price of a plan. You have little to lose by doing so, and potentially much to gain. Extended car warranties are lucrative financial products that leave vendors with much leeway to adjust costs and still make a profit on the sale.
Is an Extended Warranty Worth it?
If you’re buying a vehicle with a reliable track record and you have a warranty on it, you may not need extra protection, especially at the price you’ll have to pay for it.
“Extended warranties are generally a bad deal,” said Jack Gillis, executive director of the Consumer Federation of America, to Consumer Reports. “First of all, they are not warranties and one doesn’t get the same legal protection as you do with a warranty. They are service contracts, or better, overpriced insurance plans.”
The smarter play may be to “self-insure.” For this, you’d sock away some cash in an emergency account to take care of any repairs that might come up. Then, if you don’t need to use the funds for your car, you still have the money for other purposes.
If you plan to drive this car to the end of its life, you may sleep better with an extended warranty. Just be sure to do your homework first so it’s peace of mind that is real.
Car warranty vs Car insurance
Both have their place, but only one is required by law. Car warranties are not mandatory while car insurance is. Your car warranty only exists to help with mechanical repairs on your vehicle. It will not help with any damages caused to others that you are liable for. Basic liability for your car, inversely, will pay for damages caused to others that you are responsible for but will not pay for any damages to your vehicle.
Of course, more extensive car insurance coverage options exist, which can reimburse damages to your vehicle. However, no form of car warranty exists that will cover damages to other cars or people. And even with full and comprehensive coverage, you may find that some breakdown of car parts still isn’t covered.
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