Experts weigh the pros and cons of investing in this extra protection
Whether buying new or used, reliability is one of the chief attributes consumers want in a vehicle. Consumer Reports’ advice is simple: Buy the most reliable car you can afford to avoid having to pay later for costly repairs. But there will still be people who want more protection than can be provided by a reputation for reliability.
That is where extended warranties—sometimes called vehicle service contracts—come into play. These agreements function a lot like health insurance, and they can give consumers the peace of mind that comes from a set cost for maintenance and repairs. But before you go out and buy an extended warranty, be aware that they can cost more than they’re worth, if they’re worth the money at all. Extended warranties are money makers for those who sell them.
“Extended warranties are generally a bad deal,” says Jack Gillis, executive director of the Consumer Federation of America. “First of all, they are not warranties and one doesn’t get the same legal protection as you do with a warranty. They are service contracts, or better, overpriced insurance plans.”
Consumer Reports has seen in member surveys over time that a majority of purchasers never used the warranties after buying them, and those who did shelled out more for these plans than they got back in benefits. This isn’t surprising, given that this is a for-profit business. And despite not recouping the investment, many customers were satisfied with their decision for the protection against unexpected, costly repairs.
“Extended warranties remain a major challenge for consumers,” says Chuck Bell, programs director for CR’s advocacy division. “Figuring out if a plan is fairly priced or a good value is difficult because they are complicated legal agreements. Dealers may also charge steep markups on the contracts, at different rates for different customers. Most consumers are probably better off ‘self-insuring’ and assuming the financial risk themselves.”
This is the core challenge for consumers: Will it be worthwhile buying the added protection? And who can I trust to provide it?
Learn more about extended car warranties.
Bell also urged caution when fielding prerecorded sales calls from companies selling extended warranties. Robocallers and scam artists abound.
“It’s a highly emotional situation when you’re sitting in the F&I [finance and incentives office at the dealership] and you’re being told you’re stupid if you don’t spend an extra $20 to $30 per month for the extra protection,” says Rory Joyce, head of Credit Karma’s autos division. But that nominal increase on monthly payments adds up, and Gillis says many extended warranties are duplicative of the warranties provided by manufacturers.
“In addition, the fine print often prevents one from exercising the benefits,” he says.
There’s also the age of the car to consider. “If you’re buying a new car, it doesn’t make much sense to buy additional warranty protection because the repair costs when a vehicle is just out of warranty are typically low,” Joyce says.
Although T8Auto generally recommends extreme caution regarding extended warranties, there are situations when one might make sense, says Alain Nana-Sinkam, vice president of strategic initiatives at TrueCar.
“Like many of these choices, it depends on your ownership plan and your value equation,” he says. In other words, if you plan on keeping your car until the wheels fall off, it makes a lot more sense to invest in added protection than if you’re likely to switch cars every few years. Nana-Sinkam says that anyone interested in buying an extended warranty should have a good understanding about what it covers—powertrain, electronics, and in the case of cars with expensive wheels and low-profile tires, wheel and tire coverage—and whether or not the plan has a deductible.
“Cars are increasingly run and managed by computers, and fixing those components when they break can be costly,” he says. “Lots of people don’t realize that run-flat tires cannot be plugged like their old-school counterparts, and they are crazy expensive. So something like a tire and wheel package, which will cover road hazards, might be a good option.”
Credit Karma says that while extended warranties can bring peace of mind regarding potentially expensive problems, there are a number of downsides to consider. First, if coverage is rolled into your auto loan, the cost carries interest. Also, plans often don’t cover everything, so you can avoid unpleasant surprises by knowing what yours does cover and what it does not. Also, check the contract for limitations on where you can and cannot have your vehicle repaired, and for depreciation clauses that can reduce the amount paid for repairs based on vehicle mileage. And know who carries responsibility for claim payouts. If you bought your policy from a dealership or agency that goes out of business, the policy will no longer cover repairs you paid for in advance through premiums.
According to Credit Karma and the Consumer Federation, the best money-saving approach regarding planning for car repairs is making payments to yourself into an emergency fund. That way, says Gillis, if you don’t end up needing the money for repairs, you can put it toward your next car purchase. But, as Joyce points out, that doesn’t work for everyone.
“It comes down to who the consumer is,” he says. “If they want peace of mind, and they’re not so organized, maybe getting an extended warranty is a good idea. There are other people who can save money by taking a more hands-on route and setting aside money for anticipated repairs.”