Key Takeaways
- An extended auto warranty is a service contract that covers car repairs beyond the time period of a manufacturer's warranty.
- These warranties typically cover the costs to repair or replace electrical or mechanical problems that are not covered by manufacturers' warranties.
- Extended warranties can last up to eight years, upfront costs can start at $1,000, and pre-repair deductibles can cost hundreds of dollars.
- Extended warranties may not be as valuable if the owner has a reliable car, car insurance, or an emergency fund to cover repairs.
- Extended warranties can provide benefits to those with used or unreliable cars or who those expect their repair costs to be unmanageable.
- Shopping around for warranties and negotiating prices can help you get the best deal on one that provides value.
Definition and Example of Extended Auto Warranty
An extended auto warranty is an optional vehicle service contract offered by manufacturers, dealerships, and independent providers at an extra cost beyond the purchase price to cover the price to repair or replace certain parts for a specified period or a certain number of miles beyond that covered by the manufacturer's warranty. Although buying an extended auto warranty is common when you buy a new car, you can usually obtain a service contract at any time before your warranty expires.
- Alternate name: vehicle service contract
For example, suppose that you buy a new electric car that comes with a three-year manufacturer's warranty. Because the car has a complex electrical system, you also opt to purchase an extended auto warranty. In the third year of car ownership, the onboard computer in the car malfunctions, but your manufacturer's warranty doesn't cover repairs of this kind. Fortunately, your extended auto warranty does cover it, potentially avoiding out-of-pocket repair costs to the tune of several hundred dollars.
Note
If you're purchasing an extended auto warranty on an existing vehicle, you can also get a service contract from your auto club (AAA for example).
How an Extended Auto Warranty Works
If you've ever owned a car, you know vehicle problems can sometimes be more complex than those covered by your manufacturer's warranty and can continue long after the warranty ends, which could put you on the hook to pay out of pocket for repairs or replacements. This is when an extended auto warranty comes in handy. These service contracts are designed to cover the costs of certain services beyond the scope of the manufacturer's warranty or after the warranty ends.
What Does an Extended Auto Warranty Cover?
The services covered by a warranty and the length of the extended warranty in time or miles can vary widely.
However, service contracts generally only cover problems with electrical or mechanical parts—specifically those not covered by manufacturers' warranties. While service contracts might cover the engine and transmission, they typically exclude routine maintenance, such as oil changes and tire replacements. However, some extended auto warranties provide similar coverage to the manufacturer's warranty.
Service contracts last anywhere from one to eight years or 12,000 to 125,000 miles. You should be able to choose the length of time or mileage that best fits your needs.
Even for covered parts repaired within the extended warranty period or mileage, a warranty might not cover your out-of-pocket costs in full. For example, limits may apply to the amount of towing expenses covered by the warranty, putting you on the hook for the rest. Some manufacturers use a depreciation factor whereby they only pay partial costs based on the number of miles you've incurred.
How Much Does an Extended Auto Warranty Cost?
Just like the amount of time and miles that will be covered, the cost of an extended warranty varies widely, anywhere from $1,000 to several thousand dollars upfront, plus per-visit or per-repair deductibles that can vary from $100 to hundreds of dollars. Zero-deductible plans are also available.
Note
When purchasing an extended warranty, remember that the price is negotiable. Try to get a better deal than what is originally offered before signing on the dotted line.
Pros and Cons of an Extended Auto Warranty
Pros
Savings on out-of-pocket repair costs
Robust, extended protection
Purchasing flexibility
Cons
Added expense
Use it or lose it
Only pays for covered expenses
Pros Explained
The advantages of an extended auto warranty include:
- Savings on out-of-pocket repair costs: If you purchase an extended warranty, you won't have to worry about unexpectedly needing to pay for a costly, covered repair, which can provide financial security.
- Robust, extended protection: Service contracts typically cover costs not covered by factory warranties or outside the warranty period. If your otherwise-reliable car suddenly has a hiccup a few years into ownership, you may be covered for the expense of repairing it.
- Purchasing flexibility: As optional add-ons, service contracts don't have to be bought at the time you buy a car and generally aren't required even if you're getting a loan, which allows you the time to make a considered decision.
Cons Explained
The drawbacks of an extended auto warranty include:
- Added expense: The upfront and deductible costs described earlier can add up to a lot of money on top of insurance costs and the price of the vehicle itself, which could put you in a budget crunch.
- Use it or lose it: Extended auto warranties act like insurance policies, meaning that if no repairs to your car are needed, there's no tangible benefit.
- Only pays for covered expenses: The repairs that your car may eventually need may not be covered by the service contract or may already be covered by a manufacturer's warranty. Coverage limits may also apply.
Do I Need an Extended Auto Warranty?
An extended auto warranty can be an unnecessary expense if you own a reliable vehicle and have an emergency fund to cover basic repairs and auto insurance. A Consumer Reports survey found that more than half of individuals who purchase an extended warranty never use it. Those who do use it end up paying more for it than they reap in savings.
However, if you're worried about your ability to pay for a repair that your extended warranty would cover, it also might make sense to buy it. Moreover, an extended warranty is sometimes a good bet for used cars: If you have a used car or plan to buy one that's no longer covered by its factory warranty, a service contract may help you reduce your out-of-pocket costs. Similarly, if you're unsure of the dependability of an existing vehicle or a new one of a make and model with a less-than-stellar reputation, an extended warranty might pay off.
How to Get an Extended Auto Warranty
If you end up purchasing an extended warranty, shop around for a manufacturer, dealership, or reputable independent provider that offers extended auto warranties.
Carefully review potential service contracts to ensure you understand:
- Upfront costs and deductibles (which can be negotiated)
- Covered and uncovered repairs and services, including whether the coverage overlaps with your factory warranty
- The warranty coverage period or mileage covered
Remember that service contracts are optional, even if you plan to obtain auto financing. If a provider indicates that the contract is required, ask them to show you where in the contract the requirement exists; if it's not present, you're not obliged to buy it.
Alternatives to an Extended Auto Warranty
The best thing you can do if you want to avoid spending extra money on an extended warranty is to shop for your next vehicle with reliability in mind. Read up on how to maintain the car properly once you drive it off the lot. A little bit of advanced research and regular maintenance can go a long way.
If you want enhanced coverage of repairs, also consider Mechanical Breakdown Insurance (MBI), a type of insurance you obtain from your car insurer to cover and maybe pay for repairs of parts not covered by extended auto warranties, depending on the insurer. As these policies and their costs are regulated, they often provide greater consumer protections and, in some cases, savings over extended warranties.
