In my last post I gave you some questions to ask before you say yes to an extended auto warranty. Today we’ll dive deeper and explore how much car warranties cost and, if you do buy, how to choose the best extended warranty for your needs. As a preface, we’re talking here about the extended warranties sold by authorized dealers, not third-party extended warranties sold online or by phone (in many cases, these third-party products are rip-offs or outright scams).
If you’ll recall, I explained that extended warranties are essentially insurance policies: you pay a premium (the cost of the warranty) to cover against potential losses (the cost of covered repairs). And, just like insurance policies, you can customize car warranties to meet your desired level of coverage and price.
How Car Warranties are Priced
When it comes to car warranty pricing, you must understand three variables: term, level of coverage, and deductible. Together, these factors will determine how much you’ll pay.
This one is simple: How long does the coverage last? Term is usually specified by a time and/or mileage limit. The coverage you purchase will expire as soon as the first limit is reached (for example, three years or 36,000 miles, which ever comes first). In addition to an extended warranty’s expiration, you should also pay attention to its origination: An extended warranty can start at the time of sale regardless of current mileage or an extended warranty may not kick in until the factory warranty runs out. (This is important because the benefits of the factory and extended warranty may differ.)
2. Level of Coverage
This is the most important aspect of any warranty. What parts and systems are covered? Your most basic warranty is a powertrain warranty. The powertrain warranty is also the most affordable, which is counterintuitive because it covers the most expensive parts to repair or replace, but that’s because those items have the lowest rate of failure. The powertrain is usually defined as your engine, drivetrain, and transmission. Here’s an illustration:
If you increase your coverage from the basic warranty, you will usually see a “ladder” of choices; the higher up you go, the more components are covered. Each warranty company has its own name for the coverage groups (such as Silver, Gold, and Platinum) but they are all structured similarly.
Increasing coverage over a basic powertrain warranty might include systems such as air conditioning & heating, suspension, steering, cooling, fuel system, brakes, electrical and seals and gaskets. A higher rate of failure in these groups of components equals more claims and a higher premium to the end user. The top of the warranty ladder is sometimes referred to as the high tech group and will usually include computerized components and motors that run a host of smaller non-critical systems such as radios, cruise control, power seat motors, and traction control systems. These small, complex, computerized systems are about as reliable as your computer at work. They may not be critical to the car being able to drive, but their failure rates are high and so are the costs to repair. That’s why they’re at the top of the ladder and add the most to the warranty premium.
Just like a $20 copay when you see the doctor, you can tailor an extended service plan deductible to fit your budget. You are usually given several basic options such as $0 deductible, $50 deductible, $100, $250, and $500, with the higher deductibles resulting in a lower-priced warranty.
How to Choose the Right Extended Warranty
The actuarial formulas used to compute warranty costs are obviously beyond this discussion, but determining which warranty to buy depends on how long you own your vehicles and how long you expect this particular car to lasts. Don’t buy a five -year warranty if you know you’ll trade the car for something else in four.
Buy the highest level of coverage you’re comfortable with. A mid-range warranty is usually best. The powertrain covers too little and top-of-the-line warranties can become cost prohibitive.
Your deductible is like an ace in the hole. I’ve seen the cost of a warranty cut in half when comparing $0 deductible to $100 deductible options. A higher deductible is a great way to lower to overall cost of the warranty. My suggestion if you have the option is a $100 deductible.
Read the Fine Print
Before you buy a warranty, understand what the exclusions are for the warranty. Ask for explanations if you’re unclear. “Wear & Tear” items (brake pads, wiper blades, belts, hoses, batteries, etc.) are not covered. You can assume that if something breaks from abuse or lack of maintenance it’s not covered. But ask if the contract can be transferred to the next owner if you sell it or if you can receive a refund for the unused portion of the warranty should you decide to cancel it. (That’s a secret dealers don’t go out of their way to share with you because they can be “charged back” if you cancel a warranty.)
Certified Pre-Owned Warranties
Manufacturers have seen extended warranties grow increasingly popular over the last 15 years, a trend that has led most manufacturers to create Certified Pre-Owned (CPO) Warranties. CPO warranties are usually the most comprehensive available (top of the ladder coverage). They cover the most systems and parts and, many times, have a $0 deductible. The best part? Some manufactures subsidize a portion of the cost of the warranty for the dealer. The dealer is then able to offer you the best warranty out there for the lowest price.
Too good to be true? Not really.
In order to qualify, the manufacturer ensures the used car meets certain standards. Thanks to this certification, buyers get a used car that’s almost as good as new. As a buyer you still pay far less than you would for a new car, but the dealer can charge more for the car than for an identical non-certified car.
Then, to make a CPO warranty claim, you bring your car back to the authorized dealer for the service work. Put simply, a CPO warranty is a win-win for everyone.
As technology advances, cars are growing increasingly complex. Although that complexity means improved safety, fuel efficiency, and reliability, it also means cars are more difficult and expensive to repair. Depending on your car ownership habits and finances, an extended warranty may help insure you from that increasingly costly risk.
Questions? Do you have questions about how extended warranties are priced or sold? Let me know in a comment.
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