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Beware of the extended warranty add-on
By Lucy
Lazarony • Bankrate.com After
hours at a car dealership, when you're feeling numb from long negotiations over
price and financing and all you want to do is step into your new car and drive
away, the real hard sell begins.
The finance manager will start talking about an extended warranty.
An extended warranty is actually an extended service contract, which covers
the cost of certain repairs and problems after a car's factory warranty expires.
Make a wrong move here and it could cost you hundreds, even thousands
of dollars.
"Very often they'll try to guilt-trip the buyer
into buying it -- protect your investment, do the right thing for your family,"
says Phil Reed, consumer advice editor at Edmunds.com. "It just makes my
blood boil." Extending
your costs
Extended warranties are enormous moneymakers for
auto dealers. "The markup on it is huge. It's at least
100 percent and often more," Reed says. "They'll sell it for whatever
they can get." You can bet an auto dealer is going to
do everything he can to push and cajole you into purchasing an extended service
contract or warranty at an inflated price. Don't let him pressure
you into a quick decision. First off, you may not need an extended warranty. And
even if you do, you'll get a much better deal later by shopping around.
People who buy and trade cars frequently should pass on an extended warranty.
There's no need to purchase one if you only plan to keep the car for three or
four years since repairs are covered under the car's original warranty. "Most
new cars have such a great warranty that you don't need an extended warranty,"
says Remar Sutton, president of the Consumer Task Force for Automotive Issues. Many
auto manufacturers now offer warranties above and beyond the once standard three-year
or 36,000 miles protection. Before you consider an extended warranty, take a close
look at your car's original warranty. It may be all you need. New
cars from Acura, BMW, Cadillac, Volvo, Saab, Mercedes, Lincoln, Lexus and Jaguar
all have four-year or 50,000-mile warranties. Cars from Infiniti have four-year
or 60,000-mile warranties. Kia and Hyundai offer five-year
or 60,000-mile warranties on all new vehicles, plus 10-year/100,000 miles powertrain
warranties, which cover engine and transmission repairs. New
cars from DaimlerChrysler come with seven-year or 70,000 miles powertrain warranties,
in addition to the traditional three-year or 36,000 miles factory warranties. When
you might want it
Let's say you plan on keeping a car long
after its original warranty expires. Should you purchase an extended service contract?
Answering these questions might help you decide. - Do
you hate surprise expenses, especially costly auto repairs?
- Will
the cost of replacing a pricey electrical part or air conditioner or transmission
bust your monthly budget? Or do you have a few thousand dollars tucked away in
an emergency fund for just these kinds of expenses?
- How long
do you plan on keeping the car after the original warranty expires?
- Would
you sleep better at night knowing that certain major repairs will be covered under
an extended service contract? Or would you rather risk it and pay for repairs
when and if they are needed?
Another thing to consider
is your car's reliability. On the one hand, new cars are more reliable than ever,
so car owners can expect fewer repairs. On the other hand, repair costs, while
infrequent, could be quite high, thanks to the complex electronics and computer
circuitry under the hood. Let's say you plan on keeping your
car for several years and an extended service contract appeals to you. There's
still no need to buy it at the moment of your new-car purchase. You
can buy an extended warranty a week, a month, even years after you purchase a
new car if you want. Shop the price down
To get a good deal on an extended service contract you'll have to negotiate
the price. Prices for the exact same warranty vary widely from dealership to dealership,
so it's important to shop around. "The amount of money
that dealers get for warranties is going up and up," Sutton says. "Dealers
right now sell warranties for $1,400 that they used to sell for $400." The best way to knock down the price on a warranty
is to shop dealer to dealer. Make it clear you'll do business with the dealer
that gives you the best price. "There's no set price on
an extended service contract," Sutton says. "The tough person gets the
best warranty." If you're absolutely sure you want an
extended warranty on a new car, you may want to shop for one within your first
year of ownership when the prices tend to the lowest. But
keep in mind. An extended warranty starts the day you purchase it, not the day
the old warranty expires. So you'll be stuck with double warranty protection that
you don't really need for a couple of years. Which
warranty?
There are two key types of extended warranties: those
backed by the car's manufacturer and those offered by independent companies, also
known as aftermarket warranties. An extended service contract
backed by an auto manufacturer is probably your safest bet. These contracts encompass
a wide range of repairs and services. The repairs can be done at any authorized
dealership and tend to be approved without a hitch. You won't pay a penny for
approved repairs unless your contract includes a deductible. An
extended warranty from an independent company could cost half as much as an extended
service contract from a manufacturer. But the quality of this kind of contract
varies widely from company to company. Shop carefully. There
are tons of really crummy extended warranty offers out there. Be leery of unsolicited
offers that arrive by mail or e-mail. Only do business with a company you know
and trust. "The only thing you have to go on is the reputation
of the seller," Sutton says. One good source for an extended
service contract is your local credit union. "Most large
credit unions have a very good warranty program," Sutton says. "And
you have the reputation of the credit union behind it." With
an aftermarket warranty, you may have to pay for the repair upfront and then wait
to be reimbursed by the company, which could take weeks. Be sure to ask about
the reimbursement process before signing on for an aftermarket warranty. Some
dealers may try to sell you a dealer warranty instead of a manufacturer's warranty.
Often, with a dealer warranty all the repairs and services on the car have to
be done at a single dealership, theirs. So if you have car problems while traveling
out of town you may be out of luck. It's best to steer clear of dealer warranties. --
Updated: Jan. 11, 2005
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