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Extended Warranties

StreetWise Auto Buying Resources

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Extended Warranties

Consumers buying a new or used vehicle at most dealerships will often be offered an "extended warranty" on that vehicle. Extended warranties are a profitable add-on for dealerships. They can pay for themselves if you car turns out to be a regular visitor to the repair shop. But if you do research on which makes and models have the best repair records before you buy, you are less likely to need an extended warranty. Do extended warranties make sense for you? And how do you use one, if you already purchased it?

What are "automotive extended warranties?"

In simple terms, they are service contracts with a warranty company that agrees to provide, under certain conditions, certain repair services for a certain period of time from an identified provider. As you might assume from the very general terms of this definition, the provisions and quality of extended warranties can vary greatly. Some are provided by national manufacturers or companies who stand behind their agreement; others are provided by fly-by-night companies based in states with weak consumer protection laws. As a consequence, consumers must examine any contract carefully and look at all the pros and cons for their individual situation.

When, if ever, does buying a service contract make economic sense?

Extended warranties sold at dealerships are generally quite expensive – often over $1,000 or $2,000 – but cost the dealership much less. Unless you are absolutely sure that you are going to keep a new vehicle for years beyond the manufacturer's warranty, then extended warranties don't make financial sense for most people. It is also possible to buy an extended warranty outside of the dealership through DCU, directly from a company, or through an organization like AAA.

Many extended warranty terms, for example, overlap with manufacturer's warranties, but the consumer can't make a claim against them until the manufacturer's warranty expires. So you might think that you've bought a six-year service contract, but the policy doesn't kick in until the manufacturer's warranty runs for 5 years or 50,000 miles. In effect, you've paid big bucks for a one- or two-year contract. Some extended warranties also cover only limited repairs.

Give any service contract you are considering a very close inspection. Read all the fine print, ask questions, and if you don't get satisfactory answers, don't buy it. Also negotiate the price. Since you don't need to buy it from the dealer where you are buying the car, it is useful to comparison shop at least online. If you really want an extended warranty, having other options is useful for negotiating.

Tips for evaluating an automotive service contract

Getting these questions answered is key to preventing unpleasant surprises down the road.

  1. Is the service contract provided by a national automotive manufacturer or a reputable national company? How long has the company been in business? What's their record of customer satisfaction?

  2. Does the coverage term of the service contract begin after the manufacturer's warranty (or any dealership warranty on a used car) has expired? If it overlaps, does the contract provide "wrap-around" coverage, which means that the contract covers repairs not covered by the manufacturer's warranty? What are the actual years of coverage (those years after manufacturer's warranty ends) for which this service contract will be the only coverage?

  3. Can you see a sample copy of the contract before you buy it? If you can't have a sample copy for review, think twice about considering that contract.

  4. What services and repairs are covered under the terms of the contract? Does the warranty provide bumper-to-bumper coverage of both wear-and-tear and mechanical breakdown problems? Or does it cover just certain systems or parts? Or, just mechanical breakdowns, not wear-and-tear failures? Experts advise that it's in the consumer's best interest that extended warranties cover damage caused by overheating as well.

  5. Does the contract require a deductible? How much? Is the deductible required "per visit" or "per repair"?

  6. What entity under the contract provides the service for the vehicle under contract? Some contracts may require that the vehicle be serviced by a single service center, even if the breakdown occurred five hundred miles away. Better contracts allow the repair to be performed by any licensed, ASE-certified mechanic.

  7. How is a claim or request for service made under contract? Must you get the contract administrator's okay before the repairs are begun? How quickly can you contact the contract administrator if that's the case? How quickly do they respond?

  8. Does the service contract company (administrator) pay for the repair claims or does the consumer pay and get reimbursed? Avoid contracts that follow the reimbursement plan; it's too easy for the administrator to deny the claim.

  9. Does the service contract company have a "claims reserve account" with a separate insurer to cover consumers with contracts should the company fail? If the company is insured by a separate entity, what is its insurance rating?

  10. What are written policies on handling disputes over what repairs are covered and about handling problems with repairs made under the service contract?

  11. Is the service contract transferable if you sell the vehicle before the contract expires? What's the warranty company's record with local and state consumer protection agencies, state attorney general's offices or the Better Business Bureau?

Making a claim under an automotive service contract

Make sure that you fully understand the requirements under the contract. Ideally you did this before you bought the contract, but if not, do it as soon as possible. Most contracts require that you follow the manufacturer's, or their, routine maintenance schedule. It is also a safe practice not to drive the car after a problem occurs, but have it attended to as quickly as possible. Running a car that is overheating, for example, is grounds for voiding most extended warranties. If you have to call the contract administrator for a ruling on whether the proposed repair is covered under the service contract, keep the phone numbers and other information you need with the vehicle in a handy spot.


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