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Beware of the extended warranty add-on

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.

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"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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