Should I Purchase an Extended Warranty (Vehicle Service Contract)?

Purchasing an extended warranty is an important decision. An extended warranty, also referred to as a Vehicle Service Contract, can be a great purchase under the right conditions. There are three major questions you should ask yourself when considering an extended warranty:

  • Does the extended warranty fit my needs?
  • How much is the extended warranty?
  • What does the extended warranty specifically cover?

For some context, here are a few things to know about extended warranties.

  • About half of all car buyers (new or used) purchase extended warranties. More say they would purchase them if they were not so expensive.
  • You can purchase an extended warranty for a car you currently own. You don’t necessarily have to buy it at the time you buy your vehicle.
  • Most extended warranties (91%) will cover at least one claim during their duration, and a significant percentage will cover multiple claims.
  • Extended warranty coverage varies dramatically, so it’s important to know exactly what’s covered. Verify slogans used, such as unlimited, bumper-to-bumper, or lifetime. When an extended warranty includes one or more of these terms, ask for written definitions. The coverage specifics are generally less than what the term implies.
  • According to a 2017 study by AAA, the average repair cost for each individual repair is $600. A vehicle will require an average of three repairs in its first seven years. The average cost to replace an engine is over $5,000. A significant number of components and sensors cost over $1,200.00 each to repair or replace. The average labor cost nationwide is over $100 per hour.

While an extended warranty is not an insurance product, they provide a similar peace of mind and protection against the worst-case scenario of repairs costing $1000, $2500, or even more than $5000. So when deciding whether an extended warranty is right for you, consider the following:

Does the extended vehicle warranty fit my needs?

To determine the fit, ask yourself the following:

  • Will I own the car for less time than the protection of the manufacturer’s warranty (usually three years or 36,000 miles)?
    If so, an extended warranty is not a good purchase.
  • Am I leasing the car?
    If so, an extended warranty is not a good purchase.
  • Do I need peace of mind?  If yes, an extended vehicle warranty contract can offer peace of mind.
  • Can I afford the out-of-pocket expense of a major car repair?
    Over 71% of Americans have less than $1000 in savings. Could you afford a repair cost of $350, $900, $1600, or more? Depending on your financial situation, an extended warranty may be a great purchase.

How much is the extended warranty?

This is a key factor. Dealerships sell 95% of all extended warranties. Sales of extended warranties are typically the highest or second-highest source of revenue for a dealership. It is not uncommon for a dealership to mark up extended warranties by $1000, $2500, or even more. However, extended warranties are available through other sources at significant savings, and can still match or exceed the coverage of extended warranties offered at dealerships. In addition, many dealerships may suggest that it is required that you service your vehicle at the dealership, even though that may not be required by the contract. So it is wise to consider the cost of the extended warranty and your ability to choose where to have your car serviced.

What does the extended warranty specifically cover?

The final factor is to know exactly what the extended warranty covers. Do not decide based on a sales slogan, such as “bumper-to-bumper” or “lifetime” warranties. There are three types of coverage, which are explained in the next section. In addition to understanding these three types of coverage, ask if the extended warranty includes the following coverages in the price being quoted, or if there is an additional cost for them. Also ask about the permissibility of other actions listed here, such as extended warranty cancellation and repair shop options.

Wear and tear coverage
This is an important coverage, and usually not included as standard coverage. Extended warranties cover “mechanical failure” or “breakdown”–that is, when a component breaks down or fails mechanically, as opposed to wearing out because it has exceeded its expected life. A majority of repairs are needed because of the latter. In those instances, the repairs would not be covered by most standard extended warranties. If the extended warranty includes wear and tear, then such a repair would be covered.

Seal and gasket coverage
Most often, this too is an additional, optional coverage not included in most warranties. If you do not have seal and gasket coverage, repair costs will not be covered. While a seal or gasket leaking essential fluid may cost under $100 to fix, the total cost to replace it can be significantly more when you add in labor and taxes. In addition, if a covered component fails or breaks down due to excess leakage from a seal or gasket not being replaced, then that component will not be covered by the warranty.

Sales tax on parts and labor
Believe it or not, some extended warranties do not cover this.

Fluid replacement for a covered replaced component
Again, most extended warranties do not cover this. For example, an extended warranty may cover the cost of replacing the air conditioning system, but not cover the cost of the refrigerant required to make it work.

Extended warranty cancellation
By law, all extended warranties may be canceled, but fees for cancellation can vary dramatically.  Ask about the cost of canceling a policy.

Extended warranty transferral by a private sale
Many extended warranties may not be transferred privately. When this is permitted, costs for transferring vary, so ask about the cost to transfer the policy.

Trip interruption coverage
Most all extended warranties offer 24/7 roadside assistance, but many do not offer additional reimbursement of a hotel, food, and car rental expenses if breakdowns occur while you are away from home. Ask if the extended warranty includes such coverage and the dollar amount limits of that reimbursement.

Repair shop options
Ask where repairs can be performed.

Coverage start dates and requirements
Most coverages for extended warranties purchased during manufacturers’ warranties begin the moment of purchase and do not require an inspection. Most coverages for older, higher-mileage vehicles either require an inspection or a “time and additional mileage driven period” before coverage begins. Ask what is required and if an inspection is required, who may perform the inspection, and who is required to pay for it.

Standard maintenance
Most extended warranties do not cover the cost of standard maintenance. If they do, compare the additional cost for that coverage to the standard cost of the required maintenance. When an extended warranty includes standard maintenance, it usually requires the maintenance to be done at the dealership or the repair shop where the warranty is sold.

Types of extended warranty Coverage

There are three types of extended warranties available.

Exclusionary coverage offers the most extensive coverage of all warranties available and states a list of exclusions of coverage. If a component is not on the list of exclusions, it’s covered. Exclusionary contracts are generally for cars no more than four model years old, and with less than 40,000 miles.

Stated coverage is usually available for both new and used cars. Stated coverage means that the covered components are stated in the contract. If a component (or service) is not listed, then it is not covered. Stated coverage wrap coverage (discussed below) is generally the only option for cars with higher mileage, typically over 40,000 miles. Stated coverage can vary dramatically, so it is very important to see exactly what is included on the list of covered components, parts, and services. If you have a choice between exclusionary or stated coverage, it is always best to choose exclusionary coverage unless there is a dramatic difference in price for what the extended warranty covers.

Wrap coverage is available for cars that have a manufacturer’s powertrain warranty that extends past manufacturer’s coverage of the rest of the engine components. Wrap coverage basically extends the coverage offered by the manufacturer’s warranty for those components (which are no longer covered after a stated date or mileage) to match the end date (or mileage) as the manufacturer’s powertrain warranty.

Have more questions about extended warranties / Vehicle Service Contracts? Feel free to contact us at 336-601-6390 or slindsaygraham@yahoo.com.

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