You just coughed up a bundle for that sharp new car.
Now the dealer is trying to talk you into throwing in another $1,200
for an extended warranty.
Why would you need that? After all, you already have
a manufacturer's bumper-to-bumper warranty tucked snugly in the glove
Welcome to the confusing world of warranties, says Charlie
Vogelheim, executive editor of the Kelley Blue Book.
Also, American manufacturers typically offer three years
or 36,000 miles for their initial coverage, and many imports offer
four years or 50,000 miles. But that means one or the other, and the
warranty is void when you hit either the mileage or time limit.
So your three-year bumper-to-bumper warranty doesn't
really cover the car bumper to bumper, and it may not last three years.
Some manufacturers extend the powertrain warranty
further, giving drivers five years or 60,000 miles for failure of
parts lubricated by flowing oil.
So should an intelligent buyer throw good money into
still more coverage?
"It depends on your appetite for risk,"
says Vogelheim. "If I recommend the most reliable car out there,
you could still have problems with it."
That's why even experts admit this purchase is a gamble.
Tipping the odds in your favor
All warranties are designed using actuarial tables, which means
the manufacturer's initial coverage translates to, "This car
isn't likely to break on our watch," says Fred Uno, a vice
president at CarsDirect.com. The cost of the extra coverage gives
you a clue toward others' repair woes after the honeymoon. The more
expensive it is, the more likely you are to add your mechanic to
your Christmas card list.
"If you're the type who wants everything handled
easily when something goes wrong, the warranty would be for you.
If you don't mind working on the car yourself or shopping price,
pass," says Vogelheim.
Keep in mind that while the extended warranty on repairs
doesn't kick in until the bumper-to-bumper warranty expires, perks
like rental cars and hotel lodging if you're stranded often do take
Second, look carefully at how long you intend to own
the car and your average commute. For example, if you plan to trade
in at three years, the warranty seems silly on the surface. But
drivers who rack up 18,000 miles a year to get to the office will
void the bumper-to-bumper terms in 24 months.
Weigh in the facts that analysts forecast the
cost of parts and labor will increase as much as 40 percent within
five years, and that about one-third of all vehicles experience
failure in a given year, warns Jon Zydenbos, founder of American
Auto Warranty Service in Minneapolis.
Dealer or third-party?
Unfortunately, your decisions don't end when
you decide to buy an extended service warranty. You have to decide
which warranty to buy.
Purchasing directly from the dealership is the safest
route because, as Vogelheim phrases it, "it's likely to be
there in the future to uphold that contract." However, even
these familiar walls have been known to sell third-party-backed
warranties, so always check the name of the company standing behind
the agreement. You want to hear it's the manufacturer or an A+ rated
Dealerships usually welcome warranty repairs because
they're compensated work. And few consumers know that manufacturers
commonly give incentives to these mechanics to get the work done
right the first time. On the other hand, in an effort to avoid revealing
expensive repairs, some unscrupulous dealers will skimp on the diagnostic
Bottom line: Anything you purchase over and above
the car is a potential profit center to the dealer, and it's in
business to make money. According to a March 2003 report by Consumer
Union's Southwest Regional Office, consumers pay a 300 percent markup
on dealer warranties. In one case, the car buyer overpaid by $2,600.
Indeed, one manufacturer's extended program was priced
$800 and $1,000 higher than what third-party companies offered CarsDirect's
Uno for comparable coverage. Third-party carriers use a wider range
of repair shops as well, so you aren't stuck finding dealerships.
On the down side, if your particular carrier is a slow payer, you
might get a cold shoulder from local mechanics. Some even require
you to pay in advance and collect from your warranty company.
Then there's the stability issue -- many such companies
belong to underfunded risk retention groups instead of true property
and casualty insurance groups, so they don't fall under your state
insurance commissioner's watchful eye. One Internet-based company
left 52,000 customers holding the bag when it went into receivership,
reports Zydenbos. Customers weren't aware of the crash until they
filed a claim.
If you want the best of both worlds, ask your dealership
if it offers less expensive third-party coverage. If something goes
wrong, it might chip in to cover you in the name of good business,
And no matter whom you purchase from, pore over the
fine print. Zydenbos tells horror stories of denied claims on engine
failures because the owner couldn't prove he made regular oil changes.
You void most warranties if the car is subject to flooding, and
some paperwork defines "off-roading" as living down a
dirt road, Vogelheim adds. Still others tack on limitations as to
how many miles you can put on the car annually.
"That seems silly, but that's what you get when
you deal with a cheap company vs. a reputable one," he explains.
"But it's not unreasonable to ask you to be a responsible car
owner, so make sure you understand your maintenance end of the deal."
-- Updated Jan. 11, 2005