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Car Dealer Secrets: Four Questions to Ask Before you Buy an Extended Auto Warranty


Extended auto warranties are like insurance policies for your car's mechanics. When I was a kid I went along with my father and watched him buy things like televisions, furniture, and even a few cars. He was a shrewd buyer and I remember being impressed how quickly and firmly he said NO to any sort of extended warranty. He taught me to buy quality products; after all, you only need an extended warranty if you buy something shoddy.

Growing up, our 300-pound Sony television lasted for more than 20 years, and the dishwasher finally died after 30 years. But times have changed. We live in a disposable world.

Even so, when products fail, we’re disappointed. We may not buy that brand again, or we may boycott the store where we bought the item. Retailers — not necessarily the manufacturers – protect themselves from this potential dissatisfaction by offering extended warranties on virtually everything. Example: I was just offered an extended warranty on a $35 toaster I bought at Wal-Mart!

Obviously, it doesn’t make sense to buy a warranty on something as inexpensive as a toaster. But what about your car?

Why extended auto warranties exist

Auto makers are no different than other manufacturers. They’re constantly working on the next generation models and pushing the technology envelope on each of the thousands of moving parts that go into a car. They test their vehicles, sure, but simulated longevity isn’t the same as years on the road. And then when it comes time to build the final product, parts suppliers with the lowest price get the contracts. That doesn’t always equate to the highest quality.

Cars aren’t perfect, and components fail. With increasingly complex cars costing more and more to repair, extended warranties have become a popular way for car buyers to protect themselves.

You might be thinking: “But my family drives Toyotas, and they’re the most reliable cars out there.”

I’ve sold Toyotas and owned Toyotas. Yes, they are reliable cars. But when it comes to major failures, all brands have weak spots: Hondas, Subarus, Fords, BMWs are all prone to major component failures.

There isn’t a manufacturer out there that doesn’t have a serious TSB (Technical Service Bulletin) for some model in their lineup. While the rate of failure is lower for some brands (Toyota, for instance), when you compare the rate to production volume the picture looks a little different. In 2010 Volvo sold 53,932 cars in the US. In 2010 Toyota recalled over 9,000,000 cars in the US alone! Granted, it was a bad year for Toyota, but you get my point. There are a lot of Toyotas on the road, and some of them will still have problems.

Four questions to ask yourself before buying an extended warranty

You may be the type of person who either always says “no” to extended warranties or always buys them. I would urge you to consider the decision on a case-by-case business with the following four questions.

1. How long will the factory warranty last?

Know and understand what the factory warranty covers. It’s the built-in coverage the car you are looking at comes with from the factory. It expires after a certain term or mileage. Most new cars come with at least three years or 36,000 miles of coverage; some companies have started to push that coverage out to four or five years and up to 60,000 miles. Most items on the vehicle are warrantied against defects or failures. Some luxury brands have begun to include “wear and tear” items: tires, brake pads, wiper blades, etc. That’s as good as it gets.

If you’re buying a used car, be sure to ask how much (if any) of the original factory warranty is left.

2. How long will you own the car?

How long do you keep your cars? I get bored every few years and look for something a model year or two newer; the side benefit is that car will have more factory warranty remaining. I know some people who drive their cars into the ground.

The average car loan is for 60 months, and very few cars will still be under the factory warranty at the end of the loan. With a long car loan, you could be facing a big repair bill while you still have a car payment.

If your factory warranty will cover you for as long as you think you’ll own the car, you can skip the extended warranty. If you’re going to own the car for a significant amount of time without factory coverage, then sit up in your chair and listen to what the finance manager has to tell you. And consider the next two questions.

3. What’s the historical reliability of the model you are buying?

What model are you buying? Do your research. I’m not just talking about cost and MSRP. Online forums contain a wealth of information. Chances are, there is one dedicated to the brand or maybe even the specific model you are looking at. Ask current owners questions. Look for known issues. Has the vehicle been reliable? Look up TSB’s. Inquire about service history if the car is used. Check model reliability history from Consumer Reports.

With all this information you should get a gut feeling on whether or not you want to risk being without warranty coverage or not. You might even completely write off a car of interest after you find out about reliability issues. Weigh the positives and the negatives. If you really like the car but it has a sketchy reliability record, buy the extended warranty. If the car is just an appliance to you and the model’s reliability is the deciding factor, skip the extended warranty and look for a different car. Just remember: There is no guarantee you won’t have major repairs even with cars best known for reliability.

4. Could your finances stand up to a major repair bill?

The most important question, in my opinion: Do you have the means to pay for a major repair if it should happen? Or would you be scrambling to borrow money on credit cards to keep your car on the road? Forget needing a new oxygen sensor or u-joint for a few hundred bucks. Major repairs might include:

  • New transmission, up to $4,000
  • New engine, $4,000 and up
  • Electronic control unit (a newer car’s brain) $2,500

Just one of these repairs would more than pay for the initial cost of the warranty.

Another kind of insurance

Remember, an extended warranty is nothing more than an insurance policy. We all buy car insurance, homeowner’s insurance, and health insurance. This is no different. If you are going to own the car beyond the factory warranty and you aren’t in a position to pay for a major repair in cash, an extended warranty is probably a good idea.

In upcoming posts, we’ll cover how warranties are priced, warranty traps and scams to watch out for (telemarketers selling bogus service contracts), and special warranties that cover no-mechanical features like paint.

Has an extended car warranty come in handy for you? Ever wished you had one and didn’t? Let us know.

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About Tom Niejadlik

Tom Niejadlik has over 15 years of experience in the auto sales industry and is eager to help us understand his industry and save money on one of our biggest expenses: our cars. He lives in Portland, Maine with his wife, sons, and golden retriever, Barkley.

Comments

  1. All great things to consider. I’m in the market for a new car and am debating on whether to buy the extended warranty or not. In most occasions I would pass, but I am looking at a VW and they have been known to have issues.

    I frequent the specific cars forums to get an idea of what the typical types of problems users are having with the car. But when doing this, you have to keep a check on reality. With all the people complaining, you may think the car is horrible. But, it’s more likely that the people that have experienced issues are vocal about them whereas the people that have no issues aren’t as vocal. Based on the comments on forums I see, VW should be out of business with all the complaints, but they are a solid car manufacturer.

  2. When it comes to extended warranties on used cars I have a couple rules. I’ve only owned a few cars, but I talk and read about them a lot.

    Used European cars (bmw, VW, saab, audi, etc) = yes Repair costs can be very high, and it is better to use mechanics that have experience with your brand of car.

    Used American cars = no, its easy to find a good low cost mechanic (at least here in the Midwest) I would suggest you avoid dealer mechanics.

    Used Japanese cars = maybe, look up reliability ratings before buying. Despite the reputation japanese cars are not always that reliable, especially the luxury models.

    Korean (Kia, Hyundai) Not enough first hand or second hand knowledge to comment.

    I do know that my extended warranty on my current (european) car has already payed for its self. It added a hefty premium to the price but Im glad I bought it.

  3. I bought my car with 3 years warranty, then after the warranty period, I did not bother to purchase the warranty, because for me it is a waste of money. However, after a few weeks, my car dealer called me and to inform me that they are sending me a copy of my one-year free extended warranty. I save my money at least for one year of my Honda City.