Is an extended car warranty worth it?

An extended warranty, also called a vehicle service contract, is an optional service that covers certain vehicle problems or repairs after the dealer or manufacturer warranty expires. So, while vehicle service contracts can be useful, be sure the additional cost is worth it before spending extra money, especially if you’re paying for one with an auto loan.

How much does an extended car warranty cost?

Cost is a major factor when considering extended car warranties. Extended warranties range in price, averaging between $1,300 to $4,600 per year.The price tag hinges on a handful of factors, such as:

• The provider.
• What is covered in your existing warranty.
• The make, model and year of your car.
• Your car’s mileage.
• Where you live and how much you drive.
• The cost of replacing parts and labor.
• Discounts you are eligible for.

Other factors that impact the cost of an extended car warranty include the extent of coverage, the level of coverage and your deductible. The higher your deductible, the lower the coverage’s cost. On the flip side, the lower your deductible, the higher your premium.

What does an extended warranty cover?

An extended warranty on your vehicle typically covers unforeseen, expensive repairs involving major vehicle systems, including heating/air, the engine and brakes. Your exact coverage will depend on the warranty you purchase and may include parts, labor or both. Some extended warranties offer optional coverage for roadside assistance, tires and other vehicle-related expenses you may encounter.

• Bumper-to-bumper warranty: The most extensive warranty; covers damages to most vehicle parts (excluding glass) but does not cover maintenance and regular wear-and-tear.
• Powertrain warranty: Covers electrical parts of the vehicle, such as the engine, transmission and other electrical components.
• Drivetrain warranty: Covers parts such as the driveshaft, axles, wheels and transmission but excludes the engine.
• Wrap warranty: Extends your bumper-to-bumper warranty if it expires before other warranties on your car do.
• Corrosion warranty: Covers the cost of repairing rust damage and other corrosion on your vehicle’s exterior.

Coverage varies with each provider and contract, so read the policy before signing up. They usually come with a long list of exclusions, such as routine maintenance, normal wear and tear, natural disasters, theft and vandalism. If a service isn’t listed, assume it’s not covered under the policy.

Your policy may not cover diagnostics or mechanic visits for repairs, either. This means you can expect to foot the bill — even if the actual part is covered by your extended warranty.

Extended car warranty drawbacks

While an extended car warranty can help you save on expensive repairs, it is not the best financial choice for all types of drivers.

• Not all repairs are covered: Because an extended car warranty typically matches the new car’s warranty, it also mirrors the limits such as mileage and what repairs are included. Look at the fine print and the exclusions list when determining if the coverage offered is worth the cost.
• There’s a time limit: Extended car warranties are only good for the period of the extended warranty. For instance, it might extend your original warranty by two years and 24,000 miles. If you started with a warranty that was three years and 36,000 miles, that would mean the full warranty is five years and 60,000 miles.
• You might not use it: Although a good percentage of drivers have extended warranties on their vehicles, many do not end up using them. According to Consumer Affairs data, 47 percent of vehicle owners have coverage, but only 1 in 10 ever use it.
• You might not need it in the first place: Know the track record of the vehicle you want to purchase by researching, including looking at car reviews. That’s what Renee Valdes, lead editor for advice at Kelley Blue Book, recommends. “If the vehicle boasts a solid track record, think twice before signing on for an extended warranty,” says Valdes.

When it makes sense to buy an extended car warranty

An extended car warranty is only useful under very specific conditions.

Extended warranties might work well for luxury car buyers who plan to drive their cars for many years beyond the bumper-to-bumper and powertrain warranties, Valdes adds. “There’s nothing worse than getting stuck with a big bill for a broken item on your luxury vehicle when there’s no warranty to cover the item,” says Valdes.

If you’re buying a used car and the manufacturer’s warranty has ended, hopping on an extended car warranty might be a good idea. Manufacturer warranting information can be found on the sticker tag on the car’s window. If you can afford to purchase a warranty, it can help pay for covered repairs.

It’s helpful to research what car maintenance costs will be during the first years of ownership. Even better, stay on top of your car’s upkeep to reduce instances of costly repairs.

“It’s always best to keep up with car maintenance so your overall repair costs remain low over the timeframe you own your vehicle,” says Valdes.

How to get the most out of your service contract

If you decide to purchase an extended car warranty, apply these tips to get the most from your coverage.

• Check the cost: Your car’s make, model, condition, coverage and contract length all impact price. There may be a fee to buy the policy; many policies cost between $1,000 to $3,000.
• Consider the deductible: As with insurance, you may need to provide a deductible when you use your service contract. This may be per visit or per repair, so check your contract to know how much you will need to pay.
• Ask what’s included: Understand what is included and excluded in your policy and if it can change. For example, if a part that isn’t covered damages a covered part, the service contract provider may deny your claim.
• Know the fine details: Check which companies can perform services and how to submit a claim. If the service contract lasts longer than you plan to keep your car, ask whether you can transfer the contract and if fees apply.
• Learn about the underwriter: A service contract may be backed by an insurance company, dealership or independent seller. Check online reviews, the Consumer Financial Protection Bureau’s complaint database and the Better Business Bureau to see what others have to say.

Once you sign for the policy, get written confirmation that the dealer sent payment to the appropriate administrator. As you use the car, keep car repair and maintenance records and receipts. The service contract typically won’t cover preexisting conditions, and mechanic or repair shop records can help show that you have provided preventive care.

If you have a problem with the auto service contract, try to resolve the dispute with the provider. If that doesn’t work, file a complaint with your state attorney general, the Federal Trade Commission and a local consumer protection agency.

Bottom line

An extended car warranty isn’t the right choice for everyone. You should consider your existing coverage, your current auto loan rate and your plans for the car. Not every service is covered, and for minor repairs, you may end up spending less by paying out of pocket.

Since this coverage is optional, review multiple providers. You don’t have to go with the service contract offered by the dealership or seller, and you may even be able to find a better deal or more covered repairs by looking elsewhere.