The average new car costs over $22,000. With that cost owners expect
trouble-free operation and longer vehicle life. So, why are many turning to extended warranty plans? Simple,
they want to protect their investment.
I call extended warranties, "health insurance
for your car." In fact, extended warranties are nothing more than extended service plans, similar to
automobile insurance in many ways. You pay money up front to avoid paying considerably more money at the
time of the repair. As with insurance, you get what you pay for, and sometimes paying less
means not getting the coverage you need.
Do consumers really need extended warranties?
Most manufacturers offer at least 3-year/36,000-mile bumper-to-bumper protection
on their new products. In addition, many offer extended warranty coverage on engine and powertrain components and limited
warranties on certified used cars. In most cases, these plans offer consumers excellent protection. But
if you drive over 12,000 miles per year or plan to keep your vehicle for a long time, then an extended service plan
might offer the kind of security you are looking for.
Keep in mind that it is less expensive to purchase the plan while the
vehicle is still covered by the manufacturer's warranty. If you wait for the bumper-to-bumper warranty to expire before looking
into and extended plan, then you will pay considerably more. Most of these plans are self funded and
insured, so the earlier you pay the lower your rate.
If you think of an extended warranty as a security blanket then you might
not mind paying money up front to avoid a large repair bill in the future. Consumers also need to look
into the reliability history of their automobile. Some models with higher-than-average repair histories might necessitate
an extended warranty. Also, consider the cost of parts. Many domestic models have repair costs that are ½ that of imported
models, making an extended warranty appealing to owners of foreign models.
What Type of Warranty?
There are three basic organizations that offer extended warranties: automobile
manufacturers, new and used car dealerships, and independent companies or third parties. Each has advantages and disadvantages.
As usual, it is up to the consumer to decide which is best for their circumstances, but here are a few of the pros and cons
of each provider.
| Provider |
Pro
|
Con
|
| Manufacturer |
factory-backed
dealer repair network nationwide
no haggling about repair, price, or components |
highest upfront cost
dealer network might be limited in your area |
| Dealer |
lower upfront cost
buy plan and service car at same place |
usually only one service point
if they can't fix it who do you call? |
| Independent |
lowest cost (usually between 30-50% less than manufacturer
plans)
most coverage choices, dealers or local repair shops
third-party warranty programs are usually their only business
|
repair shop coverage might no be as promised
some are "here today, gone tomorrow" companies | |
What to Look for and Avoid?
Regardless of the provider you choose there are a number of things to
look for and look out for. Consumers can be overwhelmed by the dizzying array of plans available. If
you do a little homework, it is quiet easy to separate the good plans from the clunkers.
Signs of a Good Plan
Corporate credit card to pay for services
Ability to choose dealership or independent repair shop
Warranty is transferable
Trip-interruption coverage
Free loaner car
BBB certified
Signs of a
bad plan
Out of pocket to cover repairs
Specific caps on repair costs
Large numbers of exclusions
Dealership pressure to purchase plan
Non-transferable
Company lacking strong track record of customer satisfaction
Most plans specify that replacement parts
may be either new or remanufactured, and that the choice of those parts is at the discretion of the provider. Many consumers
balk at this. However, you wouldn't expect a provider to pay for a shoddy repair that they have to fix again in several months.
In the long run, they are going to use the least-expensive part available that offers reliable service.
One thing to be sure and check is that,
"all programs are insured and reinsured, and that the company offering the plan will continue to pay claims for the life of
the contract." This might be the most important thing to look for in a provider. The last thing
you need to do is pay for a plan that becomes worthless if the company goes bankrupt.
If you purchase from a dealer or from a third party make sure that you investigate
the company you are purchasing from. Companies should offer a strong retail history, adequate financial reserves, and should
be highly rated by the Better Business Bureau.
Selecting the Right Plan
Do you want bumper-to-bumper coverage?
This is the most expensive up front option, but it offers the most coverage. Everything on the vehicle minus exclusionary
wear-and-tear items is covered-usually with a minimal deductible. Selecting higher per-repair deductibles
can decrease the initial cost of the plan, but if your vehicle ends up being trouble-prone, it can be more expensive in the
long run. You should also check to make sure that the plan is renewable and transferable
to a new owner.
Selecting higher per-repair deductibles can
decrease the initial cost of the plan, but if your vehicle ends up being trouble-prone, it can be more expensive in the long run. You should also check to make sure that the plan is renewable
and transferable to a new owner.
Read the fine print of the plan. What is covered and
what isn't? Where can you have the repairs performed? Do you have to pay cash up front for the repair? Each plan
is different and each provider offers a complete menu of plans to choose from. Be sure that the plan you select is right for
your needs.
Some plans also offer perks like roadside assistance, car rental reimbursement,
and travel expenses such as food and lodging if your vehicle becomes disabled while you are on a trip. These services can
come in handy for someone who travels for business or someone who commutes long distances.
Finally, call the customer-service number. See
how long the wait time is before you talk to a claims adjuster. Note their demeanor and willingness to
discuss the plan. If you purchase from that company you will have to deal with these people in resolving repair issues.
The Bottom Line
Like all services, you get what you pay for in
extended warranties. If you look for the most inexpensive plan out there, you probably aren't getting the coverage you need.
But paying more isn't necessarily better. You have to read the fine print, make sure your needs
are met, and feel confident that the plan will be there to protect you when repairs arise.
Don't be pressured into a plan at a dealership.
You can always come back and buy the plan another day. Some dealerships force people to take extended
warranties if they want to get financing. While not illegal, this usually indicates that the dealer's business practices are
less than above board. In these situations, you should probably seek out a different dealer. In the worst case,
you can always get your financing through local banks.
The decision to buy an extended warranty comes down to
your comfort level. If you don't like dealing with mechanics, are worried that you might not have the cash to cover
expensive repairs, or can't do without transportation for even a day, then an extended warranty might be for you. On the other
hand, if you have discretionary income, are comfortable with your mechanic, or have alternative transportation, perhaps it
is best to invest your money elsewhere.
In the end it is up to the consumer. A car
or truck is a big investment and extended warranties don't come cheap. Buyers need to be aware of all their options and keep
an open mind when shopping. Extended warranties offer a comfort level that some people don't mind paying
for. Just remember that the companies offering the extended
warranties are businesses and wouldn't offer the plans if they didn't make money on them.
