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Warranty wisdom

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 compartment.

Welcome to the confusing world of warranties, says Charlie Vogelheim, executive editor of the Kelley Blue Book.

Understanding bumper to bumper
In the first place, bumper to bumper doesn't really mean bumper to bumper. These contracts do cover major parts of your vehicle, such as the engine and transmission. But wear and tear items such as brakes, brake linings, tires, fan belts and light bulbs are on your dime, and no one will contract with you to cover them.

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. 

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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 effect immediately.

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 insurance company.

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 tests.

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, Uno says.

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."

-- Posted: Feb. 15, 2005

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