Do you really need an extended auto warranty?

Car manufacturers are not stupid. They know that the likelihood of a major repair in the first 3 years or 36,000 miles is very small. Most warranty claims in this timeframe are for minor adjustments and inexpensive parts. A major breakdown in the first 36,000 miles is rare. You get the most protection at the time you need it the least.

Most cars do not develop problems until the auto warranty expires. That's why you need to consider buying an extended warranty to protect your investment.

Not everyone needs an extended warranty, especially if you buy a new car every year. Read on to see if an extended warranty makes sense for you.

What is an extended warranty?

An extended warranty is a service contract to repair or replace specific components on your car within a specified time or mileage. The right extended warranty can save you $4,000 if your car needs an engine replaced. A good warranty will also cover an extensive list of equipment like air conditioning, electrical components, axles, fuel pump, sound system, and hundreds of other components on your car. When something goes wrong an extended warranty will kick in and pay for needed repairs on your car. Think of an extended warranty as protection against sudden or unexpected car repairs.

Your extended warranty is not a maintenance plan, and it does not pay for routine maintenance like oil changes, fuel injector cleaning, changing transmission fluid, brake pads and other routine wear items. Maintaining your car properly is your responsibility, and you should budget for it.

Where to buy an auto warranty

Most car dealerships will try very hard to sell you an extended warranty when you buy your car. That’s because they make a nice profit, and the salesman and finance manager both get a cut. If you buy a warranty at the dealer the price you pay is set by the dealer. They may charge you $2,000 for a warranty that costs only $500.

Before you sign anything get a comparison quote online.

How much does an extended warranty cost? That depends on where you buy your warranty, the car itself, and how much coverage you need. If you buy a Lexus with GPS navigation system, DVD player and bluetooth technology you’re going to pay more than if you had bought an entry-level Corolla with no added options. You can get a warranty that lasts for as little as 12,000 miles, or up to 100,000 miles. The longer the coverage, the more the cost. Usually the longer coverage is the best value, because the cost is only slightly more

Warranties for used cars

Most problems with used cars occur after the warranty has ran out. Major components such as engine, transmission, air conditioning and expensive electronics seldom fail in the first 36,000 miles. Unless you're prepared to pay $2,000 for a new transmission, or $1,000 for a air conditioning compressor, you should always get a warranty when buying a used car.

Make sure you know exactly what the auto warranty covers when you buy. Don't assume that just because you get a warranty for 100,000 miles you're covered. Some warranties only cover the powertrain, which is the engine, transmission, and drive axles. If you have a problem with the windshield wiper motor or power steering system you're on your own. Make sure your warranty is comprehensive and covers all components of the car.

No warranty will pay for maintenance items like brake pads, oil changes, belts and hoses. A good extended warranty will cover both major and minor mechanical parts.

Car dealers make huge profits on extended warranties, and the finance manager gets a cut of it. A warranty that costs you $1,500 to $2,000 may only cost the dealer $500. The finance manager has a vested interest in selling you a warranty that will make the most profit for the dealership, not one that will give the best coverage

Dealer auto warranties are usually provided by a third party. The dealer is not the one who is actually providing the warranty, they are just a sales agent. You don't have to get your warranty from the dealership. You can get a discount extended warranty online. The finance manager will try to tell you their warranty is better, and the cost can be included in your car payment. With an online warranty you can get comprehensive coverage and financing as well.

Before you pay for an expensive warranty at a car dealership compare the cost and coverage.

Who stands behind the warranty? This is an extremely important point that many people never consider. Be sure to get a warranty that is backed by a major company with deep pockets. If you buy a warranty that is backed by a local dealer or a startup company with few assets you will have more problems getting your claim approved. A small company or a dealer will try to find a reason to deny your claim. I've seen claims denied for lack of maintenance records, even when the part failure is completely unrelated to maintenance. You could have an alternator failure, and have your claim denied due to lack of oil change records; even though the oil change does nothing to protect the alternator. A quality warranty company would never pull a trick like this.

Always get a warranty that is backed and administered by a highly rated company like Warranty Direct. Automaker warranties are also a good choice because the manufacturer has their reputation on the line. You can get a GM warranty for a Chevy truck, or a BMW warranty for your BMW. But, there are 3 problems with warranties backed by auto manufacturers.

1. You'll pay more. Dealers have a huge markup on warranties.

2 You are forced to buy a vehicle from a specific dealer that offers that warranty. That is, if you are buying a used Honda Accord from a Toyota dealer you won't be able to get the Honda warranty.

3. You have to return to the dealer for service.

With Warranty Direct you get a warranty that is backed by a company that has the assets available to pay your claim. They've been in business over 25 years, and have a great reputation. Here are some reasons why you should consider Warranty Direct:

• 25 years in business

• $166 Million in assets

• Member Better Business Bureau

• D&B listed

• Forbes top 200 company

• $500,000,000 paid in claims

• Financing available

• Money back guarantee

When you deal with Warranty Direct you can get excellent coverage from a company that administers their own warranties, and has the assets to back them up. You'll save money by avoiding expensive dealer markups.

Watch out for private label and off brand warranties. Dealers will try to slap an official sounding name on junk warranties with little coverage and lots of exclusions. If something does go wrong the warranty likely won't cover it. Always buy a warranty from a trusted source with a reputation that can be verified.

What to look for in an extended auto warranty.

• Extensive component coverage

• Short list of exclusions

• Towing coverage

• Rental car

• Roadside assistance

• Direct payment to repair shop

• Choice of repair facilities

• Mechanical breakdown and wear and tear coverage

• No limits on # of claims

• Licensed in all 50 states

Choose an extended warranty that has an extensive list of covered parts. Watch out for powertrain only warranties or a warranty that only covers internally lubricated parts. You need a warranty that not only covers major parts like the engine and transmission, but all of the supporting parts like air conditioning, electronics, emissions sensors, brakes, and virtually every other component of the vehicle.

Look for a warranty with a short list of exclusions. The most common excluded items an extended warranty will not cover include paint, glass, chrome, upholstery, tires, damage due to an accident and routine maintenance. Avoid warranties that have too many exclusions.

A good extended warranty will pay to have your car towed if needed. Look for a warranty that includes towing benefits.

Rental car. Insist on rental car coverage when you get an extended warranty. If your car is in the shop overnight for a covered repair your warranty will pay for a rental car so that you have transportation until your car is repaired. It's standard practice that a rental is not provided until your car has been inspected, and the problem has been diagnosed. Don't expect to get a car the minute you arrive at the repair facility. First the car has to be inspected, then the claim has to be authorized. This doesn't mean you should wait an unreasonable time for your rental car, just be flexible and give the service techs time to determine the problem and get authorization for your repairs.

Roadside assistance. Look for a warranty that includes roadside assistance. The cost is about the same. That way if you have a flat tire, run out of gas, need a jump start or lock your keys in the car you can get help when you need it.

Never buy an extended warranty that doesn't pay the repair shop directly. If you have to pay for repairs and wait on reimbursement you are at the mercy of the warranty company. Chances are they will find a way to deny the claim, leaving you stuck with the bill. Avoid these kinds of schemes at all costs.

Deal with an extended warranty that lets you choose the repair facility. If your warranty company wants to dictate where you get the car repaired you could end up having to take your car to an inconvenient location, miles away, to get repairs. A reputable warranty company will allow you to choose any mechanic you want, so long as they are A.S.E. Certified, and most reputable shops are.

Get an auto warranty that covers both mechanical breakdown, and wear & tear. Beware of warranties that only cover breakdowns, and not the more inclusive wear and tear. Many parts like axles, CV joints, and tie rods can wear out without actually breaking. Read the language of your warranty carefully to determine what constitutes a part failure.

No limits on claims. A good warranty will have no limits on how many claims you can file, or the total dollar amount of a claim.

Choose a nationwide warranty company that is licensed in all 50 states. New York and California place very stringent requirements on extended warranty companies. By doing business with a warranty company that is licensed in all 50 states you know they have met very strong requirements.

Not all warranties are equal. When you buy from a trusted company with an established reputation you can be assured that your claims will be paid when you need them. Here are 12 signs that you are dealing with a quality warranty provider.

A solid history. Look for a warranty provider that has been in business for a long time and has a verifiable track record. Beware of internet-only companies that have no known history.

Strong financial footing. Only buy a warranty from a company with established assets and cash in the bank. Otherwise they may not have the funds to pay for your repair, and may even be out of business by the time you need to file a claim.

Membership in consumer protection organizations. Look for companies that are members of The Better Business Bureau, Web Assured, or Square Trade. Don't just look for the BBB logo. Check the comments other people have made at BBB Online. Are there any unresolved complaints?

Insured by an "A" rated insurance company. Choose a warranty company that is insured by a top-rated company like A.M. Best or American National Insurance. An insured company will have a good record for paying claims. If too many claims are made for non-payment the insurance company will intervene to protect their assets. Many warranty companies do net even qualify for coverage from these top-rated insurers.

A record of paid claims. Choose a warranty firm that has a record of paid claims.

You choose the repair facility. Beware of warranties that require you to take the vehicle to a specific repair facility. This is a convenient way of avoiding your claim if the warranty company is in cahoots with the repair shop.

Claims are paid directly. Never go with a warranty that requires you to pay for a covered repair up front, and then wait for reimbursement. You're not likely to see your money again.

Roadside assistance. The better warranties will help you if you run out of gas, lock your keys in your car, need a jump start, or need a tow.

Financing available. Look for a warranty that offers financing. Why finance your warranty with your car and pay interest on it for 5 or 6 years? A quality warranty company will give you a convenient way to pay.

Money back guarantee. Look for a warranty that offers your a money back guarantee, and make sure your warranty can be cancelled in case you sell or trade your car.

Transferable coverage. A great selling point if someone else wants to buy your car.

A brick and mortar company that also does business on the web. Beware of online-only warranty companies.

Warranty Direct is the only extended warranty I recommend because they meet all 12 signs of a quality warranty company.

When is the best time to buy an extended auto warranty?

You will save money and get more coverage if you buy an extended warranty when you buy the car. Some people think that by waiting until the manufacturer's warranty has expired they can get more coverage, or get a better price. That’s not the case. Buying a warranty is like buying life insurance. The warranty costs less, and covers more, when the car is newer and has fewer miles. A warranty for a higher mileage car costs more and covers less. Always buy a warranty within 30 days of your car purchase to get the best pricing and coverage.

When you buy an extended warranty you are paying for future repairs at today's rates. The labor rates that dealerships and repair shops charge has been steadily on the increase, with hourly charges increasing by $15 to $20 per hour over the last few years.

As a vehicle ages and the odometer begins to show more miles the price for an extended warranty increases. By buying a warranty at the time of vehicle purchase you lock in today's lower rates.

Pre-existing problems

Don't buy a used car with pre-existing problems and expect the extended warranty to repair it. This is a common scam used by car salesmen. They will try to convince you to buy a car that you know has problems, and suggest that you have it repaired under your extended warranty.

First, never buy a used car that you know has problems unless you know exactly what is wrong, what the cost to repair is, and are willing to spend the time and money required to fix it.

Second, never expect an extended warranty to take care of pre-existing conditions. If you have a claim on your extended warranty in the first 90 days it's going to trigger a red flag. The warranty company will most likely send an inspector to the repair shop. They can easily tell if damage or wear has occurred recently, or if it has happened over time.

Note: A few of the better auto warranty companies will do an inspection before you buy a warranty to determine if the car has any pre-existing problems. This is a great way to prevent claims from being denied. Fly-by-night warranty companies simply do not have the resources to do pre-purchase inspections. These companies will routinely deny claims in the first 90 days. Ask if your warranty company does a pre-purchase inspection.

Get approval before authorizing repairs.

If you need a repair that is covered by your warranty get approval before having any repairs made. Read your paperwork. There should be instructions about what to do should you need a covered repair. Don't just have the work performed and automatically assume your warranty will cover it. Sometimes a warranty company will automatically approve routine repairs, especially if this is a common repair on your particular car. Other times they will want an independent inspector to physically see the problem before authorizing repairs. Especially if it is an expensive or unusual repair. You must get prior approval before performing any repairs. Not doing so could result in your claim being rejected. Always follow the instructions on your warranty documents.

Make sure your warranty is backed by an insured company.

Any dealer can print a document that says Extended Warranty. Be sure you are buying a warranty that is insured by an independent insurance company.

If you buy a warranty from a dealer that goes out of business, and that warranty was not backed by insurance company, you will not only lose the money you paid for the warranty, but you will have to pay for any repairs out of your own pocket.

When does a used car warranty actually begin?

When you buy a used car the dealer may offer you a warranty that sounds good on the surface. Typical used car coverage is 5 years / 75,000 miles, or 6 years / 100,000 miles. What they don't tell you is that the clock started ticking on the vehicle's in-service date, which is the date the car was originally sold new.

A 4 year old car would only have 1-2 years of remaining coverage. Not as good a deal as it sounded. Always insist on a warranty that starts on the day you buy it.

Where do you take your vehicle for repairs?

Some warranties require you to return to the dealer where you purchased the warranty for repairs. This can be inconvenient, especially of you move or have a problem while traveling.

Better warranties allow you to take your car to a repair center you choose, whether it is a dealership, a chain like Goodyear or Pep Boys, or your local independent mechanic. Insist on a warranty that allows you to choose where to have your car repaired.

Get a transferable warranty.

If you sell your car the fact that you have a warranty can be a major selling point. Be sure that your warranty is transferable to the new owner, and can be cancelled if needed.

Don't buy on price alone.

Bargain-priced warranties are seldom worth it. Make sure you are getting a quality warranty that offers extensive coverage with few excluded items. If you do a Google search for "extended warranty" you'll get around 8,000,000 results. Many of these are fly-by night companies who will take your money and disappear when you need a repair. Make sure you are dealing with a reputable, established company that is insured. A warranty company with no assets can not pay claims.

Low-priced warranties are often not worth the paper their written on. Read the contract carefully. Before buying a budget priced warranty ask these questions:

• Does it cover wear & tear in addition to parts failure?

• Is damage due to overheating covered?

• Does it pay for towing?

• Is a rental car provided?

• What repairs are not covered?

• Is the warranty company financially sound?

• Are there any complaints on file at the Better Business Bureau?

• Are there any special requirements?

• Are they an internet-only company?

• How long has the warranty company been in business?

The best value is not in the price alone, but in the quality of service. If your warranty company is only looking for a way to deny your claim then price is irrelevant. Look for a warranty company with a solid reputation and a history of paying claims promptly.

Overheating

Insist on a warranty that covers damage due to overheating. Bargain-priced warranties can contain exclusions for overheating damage. If you have a water pump or cooling system failure it can quickly cause your car to overheat and ruin a $4,000 engine. In fact, overheating is a leading cause of engine failure.

If your car overheats you should stop as soon as it is safe to do so. Do not continue to drive a car that is overheating. Continuing to drive a car that is overheating will result in the engine seizing up. The pistons will literally weld themselves to the cylinder walls. No warranty will cover negligence like this.

A quality warranty will cover overheating providing you act immediately to prevent further damage.

Deductibles

Some warranty companies will gouge you on the deductible by charging you $250 to $500 deductible per repair before warranty kicks in. Choose a warranty with a low, or no deductible. Many repairs will cost less than the deductible, leaving you with the equivalent of no coverage. This is a bogus way of denying your warranty claim in advance. A quality warranty will have a deductible of no more than $100, and many give you the option of zero deductible.

Check the wording of your warranty contract carefully, and make sure the deductible is per visit to the repair shop, and not per repair. That way if your car needs more than one item repaired you still pay only 1 deductible.

Misinformation about extended warranties

Car dealers put out a tremendous amount of misinformation about extended warranties. That's because they want you to buy their dealer warranty, which is usually a huge rip-off. Dealer's charge huge markups on warranties. Don't be fooled by their scare tactics which are designed to separate you from your money.

Here are some common extended warranty misinformation techniques as spread by unscrupulous dealers.

You can only buy an extended warranty from an auto dealer. False. Dealers want you to believe they have the exclusive right to sell you an extended warranty. In fact, many would have you believe they are granting you a favor by allowing you to buy from them. The fact is dealer's make a huge portion of their annual profits from the sale of extended warranties and financing. Compare the dealer's price and coverage with Warranty Direct.

The bank requires an extended warranty. False. If the finance manager tells you that your loan can only be approved if you take the extended warranty then he is not only lying, but violating Truth In Lending laws. It's illegal for a dealer to force you to buy a warranty in order to obtain financing. Your financing is approved based on your credit score, and your ability to repay the loan. Not whether you purchase an extended warranty. Many extended warranty firms offer interest free financing, so why pay added interest on your car loan just to finance a warranty?

An extended warranty gives you complete bumper to bumper coverage. False. Car salesmen and their finance managers will often grossly exaggerate what the warranty covers in order to get you to buy it. They don't plan on being around when your vehicle needs service. There is no such thing as a bumper to bumper warranty, and every warranty will exclude certain items. No warranty will pay for routine maintenance. Other common exclusions are paint, upholstery, glass and chrome. Read the fine print carefully to see what's covered.

Dealers won't honor a warranty bought elsewhere. False. This is simply misinformation put out by the sales staff to try and force you into buying a high-priced warranty at the dealership. If a salesman tells you they don't honor third-party warranties ask the service manager if this is a fact. In most cases the service manager is happy to honor your warranty. It just means more sales for the service department. When you buy your Warranty from a company like Warranty Direct your repair is paid for by their credit card. You're really a cash customer as far as the service manager is concerned. In rare cases when a dealership will not honor their warranty or take their credit card Warranty Direct will reimburse you for covered repairs.

Warranty basics

here are some basic points you need to consider before you spend money on an extended warranty.

• Who administers the warranty & pays claims?

• Will the warranty cover the full cost of repairs?

• Is there a deductible, and if so, how much?

• How much is it worth to have an extended warranty?

• What is covered?

• What is not covered?

• How long does coverage last?

The warranty administrator stands behind your warranty and pays any claims. Find out who administers your warranty. Is it the dealership, an independent company, or a highly rated, insured firm backed by millions of dollars in assets. You want an administrator with strong assets that has the financial ability to remain in business and pay your claim when needed.

Be sure your warranty will cover the full cost of repairs. If the warranty places limits on how much it will pay for a specific repair you could be stuck with the difference. Choose a warranty that will pay the retail cost for repairs.

Make sure the deductible is reasonable. No more than $100. You can sometimes pay slightly more and get a warranty with $0 deductible. Your deductible should be per claim, and not per item. That way you can have more than 1 item repaired on the same repair visit and still pay only 1 deductible.

How much is a warranty worth? Even minor repairs can cost several hundred dollars. An extended warranty can easily pay for itself even if you only use it 1 or 2 times. A major repair like a transmission or engine replacement can easily run you $2,000 to $4,000. With an extended warranty you pay only a small deductible and the warranty pays the rest.

What’s covered / not covered? Extended warranties fall into 2 basic categories. These that specify a list of parts that are covered, and those that specify a list of parts that are not covered.

The best kind of warranty is one that specifies what is not covered. That means everything else is covered. These warranties are known as bumper to bumper or exclusionary warranties. Just make sure the list of what is not covered is a short one. Better warranties usually only exclude routine maintenance, paint, upholstery, glass and other similar items. Most mechanical components are covered.

A warranty that specifies a list of parts that is covered is known as a named component warranty. The list of components may be only a few, or as many as 500. That still leaves many items the warranty will not pay for. Not as good as a bumper to bumper warranty so compare coverage and price.

How long is your warranty good for? If you buy a 4 year warranty make sure it is good for 4 years from the day you buy it. Some used car warranties revert to the vehicles in service date, so the clock may be already be ticking.

Warranty scams

Certified pre-owned warranty scam.

If you are buying a certified used car it may automatically come with an extended warranty at no extra cost as part of the certification process. However, some ethically-challenged finance managers will try to sell you an extended warranty that gives zero additional coverage. Your best defense against this scam is to educate yourself on the certification program. Details vary by manufacturer, so you should find out exactly what buying a certified car from that manufacturer includes. If you get full coverage up to 80,000 miles, and the finance manager wants to sell you a warranty that covers you up to 80,000 miles you are being scammed. Find out exactly what you get by buying a certified pre-owned before you buy additional coverage you may not need.

We found one car dealership that was routinely having buyers sign a form waiving their rights under the state lemon law unless they agreed to purchase an extended warranty from the dealership. Cars By Phone, Inc, located in New York, would have buyers sign a “Delivery Checklist” that included a provision stating that the buyer gave up their rights under the New York Lemon Law unless they purchased a warranty from the dealer.

Fortunately New York attorney general Eliot Spitzer got word of this and put a stop to it. The dealer had to pay $5,000 in civil penalties to the state. Thanks to Spitzer’s efforts 4,300 cay buyer’s now may be eligible for refunds on repairs made during the lemon law period.

You don’t have to waive your rights just because you do not buy the dealer’s warranty. Never sign a form doing so.

The dealer takes your money, but doesn’t pay the warranty company.

Auto dealers are just middlemen and sales agents when it comes to extended warranties. A crooked dealer can sell you a warranty, keep your money, and never activate your warranty. You may never even realize you’ve been had until you need to use the warranty. By then the dealer may have skipped town.

This practice was going on at Gerow’s Auto Sales in New York until the State Attorney General intervened.

The best way to avoid this is to only do business with an established, reputable warranty company. Make sure they have been in business for a long time, and have assets backing their claims. You can check out a warranty company at the Better Business Bureau web site.

Does your warranty pay for new or used parts? You may be surprised to find that your extended warranty administrator plans to repair your car with used parts. The transmission may go out in your car at 70,000 miles and you discover that the transmission is being replaced with one from a salvage yard that has over 90,000 miles -- how long do you think that one will last? Make sure that your warranty provides parts that are new or remanufactured, and not used parts from junked cars.

Refund scams. You can cancel an extended warranty and get a pro-rata refund on the remaining balance. If your car is financed the refund is applied to the loan. This is standard practice since the financial institution has the first priority under the contract you signed. The scam comes in the fact that the dealer doesn't always refund the balance as you request. Your warranty may not be cancelled on the first request. Some dealers bank on the fact that most people never follow up to see that the bank has applied their refund. The payment doesn't drop. The refund is just applied to the back end of the loan. If you cancel your warranty be sure that your bank actually receives the refund and credits your account.

How to decide if you need an extended warranty.

You do not need an extended warranty if:

You're buying a new car and you are positive you will get rid of the car before the factory warranty is up.

You are willing to assume the risk, and you are in a position to pay for expensive, unexpected repairs.

You are leasing a car, and the lease ends before the warranty. Be sure that your mileage stays under the lease limits. You're responsible for returning a leased vehicle in good condition. If the car needs repairs you could face extra charges from your lease company.

You do need an extended warranty if:

You are buying a new car and you plan to keep it and get your money's worth.

You're buying a used car that is out of warranty, or one that will be out of warranty soon.

You want to protect yourself from suddenly facing a huge repair bill.

You count on your car for transportation and you don't want to postpone repairs when they are needed.

You need substitute transportation when your car is in the shop for repairs covered by your extended warranty.

You want roadside assistance available in case you ever need it.

You'll have to decide for yourself whether the extended warranty is worth it. It makes more sense when you get the most coverage for a lower price, so be sure to compare quotes from your dealer with quotes from independent sources.

Keep all maintenance records. If you have a problem with a major component like an engine or transmission your warranty administrator will likely want to see service records to prove that you maintained the car properly. If you have never changed your oil in 50,000 miles don't expect your warranty to cover a new engine.

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