The one thing a car buyer wants when they purchase a new or used car is reliability. They want their cars to start immediately and not break down on the road and leave everyone stranded.
Manufacturers’ warranties on new cars take care of this problem for several years, in most brands up to three years. But what happens in the years after the original warranty expires? That's when the subject of buying an extended warranty comes up.
But does it make sense to purchase an extended warranty? Is it worth the cost? Let's look at the pros and cons and find out if it would be a wise decision for you to purchase an extended warranty from a car dealership or a third-party warranty company.
What is Covered by a Manufacturer’s Warranty?
A manufacturer's warranty for most brands of new cars is usually for three years or 36,000 miles, whichever comes first. However, Hyundai and Kia have broken out of the pack and upped their bumper-to-bumper coverage to five years or 60,000 miles.
Brands that have a reputation for high reliability – such as Toyota, Honda, Mazda and Lexus – offer warranties of three years or 36,000 miles.
Three other brands – Cadillac, Tesla and Lincoln – are now offering warranties up to four years or 50,000 miles. This is obviously an attempt to attract buyers by offering warranties higher than the other brands.
In addition, most car manufacturers offer a powertrain warranty that covers up to five years or 60,000 miles and begins after the original bumper-to-bumper warranty expires. A powertrain warranty covers anything that goes wrong with the car's engine transmission and suspension, which are typically expensive repair jobs. The good news is that this powertrain warranty is free; you don't have to pay for it.
Read More: What Does a Bumper-to-Bumper Warranty on a Car Mean?
What is an Extended Warranty?
An extended warranty is a plan that would pay for certain repair costs on your car and usually picks up coverage after the manufacturer's warranty expires. Most extended warranties are not as extensive and do not cover the same parts as the manufacturer's original warranty. You have to read each contract to find the level of coverage.
Extended warranties do not cover routine maintenance, such as new tires, oil changes and brake replacements. Some warranties offer additional benefits, such as roadside assistance, but they are separate purchases.
Peace of mind is the most common reason to purchase an extended auto warranty, also known as a vehicle service contract.
According to a survey from Consumer Reports, 55 percent of the people who bought an extended warranty never used it and only one-quarter indicated that they would buy one again.
Even those survey participants who used their warranty to pay for covered vehicle repairs found that the cost for the repairs was less than the cost of the warranty.
The most satisfied consumers were those who purchased extended warranty plans for the least reliable brands: Mercedes, BMW, Chrysler, Dodge. They used their extended warranties most frequently to cover expensive repairs.
The least satisfied consumers were the ones who purchased extended warranty plans for the most reliable brands: Mazda, Honda, Lexus and Toyota.
Read More: Tips on Buying a New Car With Cash
How Much Does an Extended Warranty Cost?
The cost for extended warranties ranges from $1,000 to $3,000 and varies depending on the insurers’ expectations about the reliability and expected future repairs that will be needed for your car.
Some extended warranties require you to pay a deductible. These deductibles can be applied on a per-repair basis or a per-warranty service visit. If a problem can't be fixed in a single visit, you could wind up paying multiple deductibles for a single repair problem.
Read More: Car Buying Rules On a Three-Day Grace Period
When to Buy an Extended Warranty
If you’re buying a new car, you don't have to purchase an extended warranty at the time you purchase the car. You can wait for the 36,000-mile factory warranty to expire and then purchase an extended warranty if you want. By that time, you'll have a pretty good idea of how the car is performing and what maintenance will be needed.
Think of it this way. Why would you pay someone $1,500 today for a product that you won’t use for at least three years?
Besides, if you purchase an extended warranty when you buy the car, the dealer will probably include the cost of the contract in your loan, and you’ll wind up paying interest on the cost of your contract.
There's no reason to purchase an extended warranty when you buy the car; you can wait until the original manufacturer's warranty expires and then purchase the extended warranty if you feel it's needed.
If you’re buying a used car from a dealer, the original manufacturer's warranty may have expired and purchasing an extended warranty could make sense. If you are purchasing a certified pre-owned vehicle through a dealer, that used vehicle probably already comes with some form of extended warranty
How long do you plan to keep the car? If you're going to keep the car for less than three years, then you will still be covered by the manufacturer's warranty and have no need to add extended warranty coverage.
On the other hand, if you are going to keep the car for five years, six years or more, then you could consider buying an extended warranty.
Is an Extended Warranty Worth the Cost?
The major benefit and selling point of an extended warranty is that it can save you money if your car has to have an expensive repair that the contract covers. In this case, you would only be responsible to pay the deductible and the warranty would cover the rest. However, the likelihood of incurring such an expensive repair bill is not very high. It could happen, but it's not likely.
Many consumers who purchase extended warranties never use them.
Statistics show that the cost of new car repairs ranges from $400 to $600. If you purchased an extended warranty for $1,500, and it pays for $600 in repairs, then you've lost money.
You have to decide for yourself if the cost of the extended warranty is worth the peace of mind against the probability you will have to use it versus your ability to pay out of pocket for repairs if you don't have a warranty.
The best strategy is to buy a reliable car and keep it properly maintained. These days, a car can last more than 200,000 miles with proper maintenance and not suffer any expensive breakdowns.
Instead, put the $1,500 cost of an extended warranty in a savings account and use it to make any repairs that come up. If you don’t use the money, you can use it as a down payment on your next car.
The decision of whether to buy an extended car warranty boils down to having peace of mind. Financially, it's hard to justify purchasing an extended warranty if you own a reliable car brand like Honda, Toyota or Lexus that may not need many repairs. On the other hand, if you are driving a car with a history of needing frequent auto repairs, then purchasing an extended car warranty could make sense, maybe even adding separate coverage for roadside assistance for more security.
- Consumer Reports: Should You Get an Extended Warranty for Your Car?
- CreditKarma: An Extended Car Warranty: Is It Worth It?
- Edmunds: Extended Auto Warranties: 5 Questions to Ask Before You Say 'Yes'
- U.S. News: Should I Get an Extended Warranty on a New or Used Car?
- Car and Driver: Factory Warranty: Everything You Need to Know
- Cars.com: What’s the Most Reliable New-Car Brand for 2020?
- Consumer Financial Protection Bureau. "What Is an Extended Warranty or Vehicle Service Contract?" Accessed Oct. 6, 2020.
- Consumer Financial Protection Bureau. "What Is the Difference Between a Manufacturer’s Warranty and an Extended Vehicle Warranty or Service Contract?" Accessed Oct. 6, 2020.
- Kenan-Flagler Business School. "Might I Interest You in an Extended Warranty?" Pages 11–12. Accessed Oct. 6, 2020.
- Federal Trade Commission. "Auto Service Contracts and Warranties," Accessed Oct. 6, 2020.
- Endurance Warranty. "How to Get the Lowest Extended Car Warranty Deductible." Accessed Oct. 6, 2020.
- Consumer Financial Protection Bureau. "Am I Required To Purchase an Extended Warranty or Guaranteed Auto Protection (GAP) Insurance From a Lender or Dealer To Get an Auto Loan?" Accessed Oct. 6, 2020.
- Consumer Reports. "Extended Car Warranties: An Expensive Gamble," Accessed Oct. 6, 2020.
- California Department of Insurance. "Guide to Automobile Service Contracts, Extended Warranties and Other Repair Agreements." Accessed Oct. 6, 2020.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.