The F&I representative will almost surely try to sell you an extended warranty or service plan. Most of the time, these plans are a losing bet. A Consumers Union survey conducted in December 2007 proves this point. We polled 8,000 owners of five- and six-year-old vehicles that had been covered by extended service plans. Here are some key findings:
- Sixty-five percent of those surveyed said they spent significantly more for the contract than they got back in repair-cost savings. Respondents said their extended warranty cost them $1,000 on average while providing an average benefit of $700. That means the average loss was $300. A big reason: 42 percent of extended warranties in our survey were never used, in most cases because the vehicle didn’t need repairs or the standard manufacturer’s warranty sufficed.
- Only about one in five respondents said they had a net savings. In general, extended warranties were a better deal for those who bought more troublesome cars, those scoring lower in our reliability Ratings. When we looked at net costs by car make, only owners of Pontiacs and Jeeps broke even, because on average they had covered repairs that equaled the warranty cost. Other reasons to look askance at extended warranties include these considerations:
- Many consumers consider extended warranties as insurance, but in most states they legally are not. That is, they’re not covered by insurance-type regulations. That means that buyers of extended service contracts in states that don’t consider them to be insurance don’t enjoy the same regulatory safeguards that they get from, say, auto insurance, whose price must bear a reasonable relationship to cost.
- High commissions. Since extended service contract pricing is not regulated, dealers charge whatever the market will bear, and a 50 percent cut for sales commissions is not unusual. By contrast, only 17 percent of your annual premium for auto insurance goes to commissions and other selling expenses.
- Many brochures we reviewed tend to wax eloquent about “comprehensive” coverage for hundreds of parts and other benefits. But they usually don’t say much about numerous exclusions and limitations. To learn that, you need to delve deep into the contract language. For instance, if the failure of a non-covered part causes damage to a covered part, then you may be out of luck. For example, if the timing belt was not covered and it fails, resulting in a badly damaged engine, which supposedly was covered, then you could be on the hook for the entire engine-repair cost as well as the timing belt.
The best course of action for most consumers is to buy a car that gets top reliability scores in our vehicle Ratings, and then you most probably will never need an extended warranty. But if your heart is set on a car with a below-average reliability record, it’s more of a toss-up. You can decide for yourself how much “peace of mind” is worth. For example, the highest usage claims were for Mercedes-Benz, for which we have a few models not recommended due to below-average reliability. But only 38 percent of those owners said they saved money with the extended warranty; their average loss was $100.
An extended warranty kicks in only when the manufacturer’s basic warranty expires and, depending on the contract you purchase, will pay for some or all of the repairs your vehicle may need after the basic warranty expires.
But since today’s new cars are typically covered by bumper-to-bumper factory warranties for at least three years or 36,000 miles, and luxury brands often offer four-year/50,000-mile warranties, it may not make sense to buy a plan three to five years before you need it, if you ever do. If you are borrowing money to finance the car, you’ll be paying interest on the cost of that unused warranty.
Furthermore, if you trade in your vehicle every five years or so, or if you lease a vehicle under a typical three-year plan with a 12,000-mile-per-year mileage allowance, then buying an extended warranty would be a waste of money.
Even if you plan to keep your vehicle longer than three years, think hard before signing up for an extended warranty.
In general, cars have become much more reliable in recent years. Properly maintained, a vehicle’s major components, such as the engine or transmission, should go without a major failure for at least 10 years or 100,000 miles. Many vehicles can reach 200,000 miles without a major breakdown. The chance of needing extended warranty coverage just isn’t as great as it used to be.
If you do decide to purchase an extended warranty, don’t feel pressured to get it the same day you buy the vehicle. You can usually add a plan any time before the basic warranty expires. You can also buy coverage directly from an independent company, which will almost certainly be cheaper than what the dealership offers. In general, however, we suggest sticking to a plan offered by the automaker instead of a dealer’s third-party coverage, which may vary enormously in quality, coverage, and price.
Review any service plan carefully to find out what is and isn’t covered, who can perform repairs, and how to file a claim. Also determine what you need to do to keep coverage, such as providing proof that you properly maintained the vehicle. (It is always a good idea to keep complete and accurate records of any maintenance and repairs on your car.)
If you buy an extended warranty from a dealer, always negotiate the price. Dealers can mark up the price they pay for the warranty by 100 percent, so there’s lots of wiggle room for negotiation there. And make sure the plan is transferable if you sell the car.
Alternatively, a wiser course might be to skip the purchase of the warranty and put the money you didn’t spend into an interest-bearing savings account and use it only if you have a major problem. If you never dip into it, this account will make a nice partial down payment on your next vehicle.