Understanding Extended Warranties

You're at the car dealership about to exchange a significant amount of money and a slew of signatures for a new (or new-to-you) vehicle. The heavy lifting may be done, but the job isn't quite complete. You still need to decide whether you want to buy an extended warranty.

This article's intent isn't to tell you if purchasing a warranty is a good or bad decision, although we do have tips that might help you decide if an extended warranty is right for you. Instead, this is designed to help you understand the differences between options you'll be offered if you decide you'd like longer-term protection.

But first, a disclaimer: The term "extended warranty" is actually a misnomer since it isn't really a warranty at all. An extended warranty is actually an insurance policy on your vehicle, a safeguard against expensive, unforeseen repairs. It covers repairs for an agreed-upon period of time and miles. True warranties, though, are included in the price of the product. Extended auto warranties are really vehicle service contracts because they cost extra and are sold separately. But to avoid confusion, we will continue to use the term extended warranty since that's the term you'll hear most often.

Two Types of Extended Warranties

When it comes to extended warranties, there are two primary types: those offered by the carmakers (also known as original equipment manufacturers or OEMs) and aftermarket warranties offered by third-party vendors.

An OEM would be a carmaker such as Chevrolet, Ford or Toyota. A third party would be an insurance or warranty company that isn't directly affiliated with a car brand.

Manufacturer Warranties

Warranties offered by the OEM come in two varieties when a vehicle is new: powertrain and "bumper to bumper." A powertrain warranty is responsible for covering your engine and transmission against defects in workmanship that would cause either your engine or transmission to not operate as intended.

A bumper-to-bumper (sometimes called "limited") warranty will cover most other items in the vehicle. In addition to major components under the hood, bumper-to-bumper warranties also cover things like navigation systems, power seats, onboard computers and various other electronics.

An extended warranty from an OEM will usually mimic what it offered when the vehicle was new, extending the length of the coverage and the allotted mileage. Some will throw in extra benefits such as roadside assistance.

When picking out which warranty works best for you, you may be offered to select one with or without a deductible. Just like your auto insurance, the higher the deductible, the lower the policy will cost. The good news is that the deductibles for OEM warranties tend to be minimal, rarely exceeding $200.

Third-Party Warranties

Many third party or so-called aftermarket warranties offer similar coverages as warranties provided by an OEM. However, some third-party warranties have exclusions, rules and requirements that OEM warranties often don't. The downsides of some third-party warranties include strict limitations on where you can have your vehicle fixed and hefty deductibles. Often there will be no guarantee that OEM parts will be used.

Another key difference is how the coverage is administered. A third-party warranty may require you to pay for a repair out of pocket and file a claim to be reimbursed later. This process isn't always quick, and it may take months to recoup what you paid for covered items. If you're considering a third-party warranty, know the payment expectations up front.

Beyond these shortcomings, third-party warranties tend to cost less than those offered by the OEM. In some cases, a third-party warranty might be the only available option. If you're buying a used Ford at a Hyundai dealership, for example, it's unlikely the Hyundai dealership will be able to offer you a Ford OEM warranty because it isn't a Ford dealer.

If you're considering purchasing a third-party warranty, take your time and read the coverage details before you agree to have it included in your purchase.

Know Before You Decide to Buy

• Are you already under warranty? To what extent is your vehicle already under warranty, and is this coverage in sync with how long you anticipate owning it? If, for example, the vehicle has a factory warranty of three years or 36,000 miles, and you plan on keeping it for two or three years — with an anticipated annual mileage of about 10,000 — an extended warranty may not be right for you. You'll likely be covered under the manufacturer's plan. However, an extended warranty may make a lot of sense if you're purchasing a used vehicle that is out of warranty or close to being out of warranty and you intend to drive the car until the wheels fall.


• How long will you actually be covered? If you purchase a seven-year, 100,000-mile warranty on a used vehicle, for example, determine when the miles and time actually begin. Does the coverage begin when you take ownership or from when the vehicle was originally sold new? Before you sign, know exactly what you're paying for.


• What's covered? What isn't? The distinctions between the various plans might seem slight, but they can prove quite important. If you've got serious concerns about the electrical system in a vehicle, or you're primarily concerned with the powertrain, make sure the warranty you're considering covers the items you're looking for. Take the time to read the inclusions and exclusions before you sign.


• Can you cancel the warranty later? Some states allow you to cancel a warranty well after purchase. If allowed, you'll receive a prorated refund amount. If this warranty was bundled into an auto loan, your principle amount will be reduced. As a result, the number of payments you have to make will also be reduced. However, the payment amount will remain the same.



• Do you have a separate budget for maintenance? You should. As a rule, extended warranties do not cover scheduled maintenance items such as oil changes, timing belt replacements or tune-ups. Most extended warranties don't cover items that wear out, such as brake pads and windshield wipers.

4 More Extended Warranty Tips

• You don't have to buy the warranty the same day you buy the car. You can sleep on the idea and decide later. But if you're financing your vehicle purchase, buying the warranty the same day should allow you to add the warranty costs into your loan.


• It is important to have recommended services done on schedule. Some warranty companies will refuse to cover a repair if the owner can't provide proof that the car has been serviced in accordance with recommended guidelines.


• According to the Federal Trade Commission, you are generally not required to buy an extended warranty in order to qualify for an auto loan. "If the dealer tells you that you have to buy a service contract to qualify for financing, contact the lender to find out if this is true," the FTC advises.


• If you are purchasing a used car from a dealership, the vehicle will likely have a Buyer's Guide affixed to the window that explains what warranty is included with the purchase.

Purchasing an extended warranty isn't the right move for every car shopper, but millions of shoppers who have purchased and used extended warranties are glad they did. If you are thinking of buying an extended warranty, take some time to read the fine print on the contract to make sure the warranty does what you want it to and doesn't have red tape you're not willing to deal with.

And if you decide you do want an extended warranty, here are some tips that should help you get a good price.