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Are Extended Warranties Worth The Money?

April 27, 2020

When you purchase a vehicle from a car dealership, they will almost certainly try to sell you an extended warranty. For some new car owners, an extended warranty represents peace of mind. For others, they’re a waste of money. So, where does the truth lie? Are extended warranties worth the paper they’re printed on?


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What Is An Extended Warranty?

An extended warranty is a contract between a car owner and a third party to cover the cost of certain car repairs and mechanical breakdowns. Aside from providing protection against unexpected vehicle repair costs, the purpose of an extended warranty is to make money for the company that sells them.

Extended warranties fall into three broad categories, and there are subtle differences between them. Additionally, warranty providers apply their own terms and conditions along with certain qualifying criteria that must be met for a claim to be processed.

An extended warranty provider may also provide optional extras for an additional cost such as roadside assistance, emergency gas delivery, or rental car reimbursement.

What Different Types Of Extended Warranties Exist?

Most extended warranties will fit into one of the three following categories:

You might hear these terms used interchangeably, and often incorrectly. There are significant differences between each type of warranty policy, including what is covered. Knowing the difference between them can save you thousands of dollars.

Extended Manufacturers Warranty

The extended manufacturer’s warranty is offered on new vehicles by car dealerships as a continuation of the manufacturer’s warranty, once it expires. When you hear the famous phrase ‘bumper-to-bumper’, it usually refers to this type of warranty.

These warranty policies are presented as an extension of the new vehicle warranty offered by the dealer to a fixed mileage or date. They may be sold as full warranties or cover only a certain area of the vehicle, such as a powertrain warranty. The extended warranty begins once the manufacturer’s warranty expires.

As brand-new cars are more reliable than ever before, you may be questioning if an extended warranty is even necessary. A recently released study by J.D. Powers found new vehicle dependability is improving every year with most complaints centered around in-car entertainment systems.

Although an extended manufacturer’s warranty seems redundant, not every car that rolls off the assemble line turns out to be perfect. Mistakes can be made during the manufacturing and assembly process and almost everybody knows someone who has bought a car that turned out to be a ‘lemon’.

Aftermarket Extended Warranty

The aftermarket extended warranty shares quite a few similarities with an extended manufacturer’s warranties, but the coverage is typically not as comprehensive. An aftermarket extended warranty will mostly cover major mechanical failures such as a blown head gasket or leaking transmission, but may not cover accessory repairs. For example, it may cover ‘power locks’, but not ‘power lock actuators’.

Unlike an extended manufacturer’s warranty, an aftermarket extended warranty is not limited to new vehicles and can be placed on a vehicle at any time, provided the vehicle meets the warranty providers qualifying conditions. These are usually available for purchase from car insurance companies or third party providers.

A critical difference between a manufacturer’s extended warranty and aftermarket extended warranty is how the warranty claim is processed. Usually, the policyholder is required to pay for the cost of repairs, then submit a warranty claim to be reimbursed after the repairs have been completed. This could take weeks or even months, and there is no guarantee that the warranty claim will be approved.

Service Contracts

A service contract is an agreement between a repair center and the owner of a vehicle that promises to pay for certain scheduled maintenance. It will often have some type of warranty component attached to it.

Service contracts are usually more expensive than extended warranties, and they rarely (if ever) cover wear and tear components under the scheduled maintenance or the warranty portion of the contract.

These are popular amongst car owners who want some guarantee against rising maintenance and engine repair costs. In general, service contracts don’t provide the same level of protection that an extended warranty does, so if you’re serious about buying one, be sure to check out exactly what is and isn’t covered before parting with your hard-earned cash.

How To Choose An Extended Warranty

Once you’ve decided to take out an extended warranty, there are three questions to ask yourself

Is the vehicle already under warranty?

An extended warranty won’t take effect until the manufacturer’s factory warranty has expired. Compare this with how long you’re planning on keeping your vehicle, and you’ll get a pretty clear understanding of how much use you’ll get from your extended warranty.

What’s covered, and more importantly, what isn’t covered?

To find out exactly what your warranty covers, you’ll need to take a magnifying glass to the fine print. Read your contract in full and ask your warranty provider to clarify anything that isn’t clear. You can also check websites like Car Complaints which will indicate the most commonly reported issues with your car. Also, take notes of any extras attached to the policy such as roadside assistance or rental car reimbursement.

Do you already have a budget worked out for car maintenance?

If you haven’t set aside money to cover a serious engine failure, an extended warranty could save your bacon. It’s worth noting that extended warranties often don’t cover wear and tear items or consumables, such as brake pads, radiator hoses, and drive belts.

Can Your Cancel An Extended Warranty?

In most states, you can cancel an extended vehicle warranty and receive a partial refunded. However, depending on where you live, this might be subject to strict conditions. For example, in Los Angeles, you can cancel a new vehicle extended warranty within 60 days of purchase, or within 30 days of purchase if you’ve used the vehicle.

When canceling an extended warranty, the first step is to contact your warranty provider as soon as possible and notify them in writing of your intention. If your warranty provider refuses to cancel your extended warranty, each state has an administrative agency that will help mediate a solution within the law of that state. You must follow this step before taking any legal action. You can also file a complaint with The Federal Trade Commission (FTC) who will ensure the warranty provider is acting within the law.

So, Are Extended Warranties Worth The Money?

This is a difficult question to answer definitively. An extended warranty can reduce financial stress in certain circumstances, and provides a level of protection and peace of mind that some car owners find comforting. Cars are not immune to breaking down, even brand new cars, and depending on your circumstances and the vehicle you’re driving, it may be worth the cost. However, most car owners won’t be able to reconcile paying money for something that they’re never likely to use.