Take a Hard Look at Extended Warranties

Buying an extended warranty with a new car always has been more about dealer profits than a good deal for you. When you're itching to drive away in that new car, it may be hard to resist dealership arguments to just wrap that extended warranty cost into your monthly payments. But since many auto makers now give you an automatic new-car warranty longer than the traditional three years or 36,000 miles, the extended warranty case is more dubious than ever.

A typical buyer of an extended warranty (also known as a service contract) pays about $1,000 but only collects on some $250 in repairs over the life of the contract, according to Checkbook magazine, a consumer publication that also operates Car Bargains car-buying service. "From a straight financial perspective, extended warranties don't make sense," says Robert Ellis, director of operations for Car Bargains. He, along with many personal finance experts, advises paying for repairs out of your savings if you are able--thus avoiding both dealer markup on the contract and the likelihood you will never get your money back in covered repairs.

Extended warranties should be especially easy to resist if you are buying a car with a long new-car warranty. But you may be among those who find the reassurance of an extended warranty worth the price. Not everyone is readily able to pay for repairs. If you are a buy-and-hold car owner and expect to have a shorter-warranty vehicle in the driveway for six or seven years, you may be a better candidate for an extended service contract. If that is your profile, here's some advice on getting the best possible deal.

You don't have to buy right away
Despite pressure to buy now from the dealer, you usually have up to 12 months to buy an extended warranty on a new car. And since the extended warranty coverage begins when you buy the contract--not when you buy the car--you get, in effect, an extra year of coverage that way. Other extended warranties are available for used cars. However, if you are buying a used car through a dealer, consider instead "certified" models that carry a new factory warranty--usually for one year and 12,000 miles.

Consider mechanical breakdown insurance
Sold by insurance agents and some credit unions, these contracts--often $500 or less for new-car coverage up to six years or 100,000 miles--cost about half what a dealer will charge you for a typical extended warranty. And mechanical breakdown insurance, or MBI, usually lets you go to the repair shop of your choice; dealer-sold warranties limit repairs to dealers of that brand and sometimes even the specific dealership where you bought it. MBI, unlike dealer warranties, also is regulated by many state insurance departments for another possible source of protection. Depending on your contract, MBI may cover only major mechanical components.

See who is behind the contract
Wherever you buy it, see what financial company backs your extended warranty. Though you may be overpaying for it, you can feel secure about a manufacturer's contract from, say, Ford Motor Credit or Toyota Motor Credit. Dealers may sell other contracts as well. If the contract is backed by an insurance company, look for at least an AA rating from Standard & Poor's. The importance of knowing who is behind your contract was emphasized earlier this year when financially troubled National Warranty Insurance Co. stopped paying claims on its estimated one million extended warranty contracts.

Know what is NOT covered in your contract
Like regular new-car warranties, most extended service contracts exclude recurring maintenance items such as brake parts and oil and air filters. Additionally, some potentially expensive repairs like power windows and seats sometimes are excluded. Make sure you know in advance what is covered.

Check the deductible
Policies often require a deductible of $100 before coverage starts. This seems reasonable because you are trying to protect yourself against big bills. But higher deductibles should make you think twice.

Make sure you can transfer the contract
If you want to sell your vehicle later as a used car, an extended warranty that goes with it will enhance its value. Avoid nontransferable contracts.

Find out how repairs are paid for
Some insurance or financial companies will pay repair shops directly. With others, you pay up front and then collect from the service-contract company--often a slow process. A factory-sponsored warranty that lets you go to any dealer of that brand is likeliest to pay the bill directly.

Remember, you can negotiate the price
You negotiated hard to get the best price on your new car. You can do the same on the extended warranty. The closer at the dealership will make it sound like a fixed price, but there is always room to haggle. For some specific dealers with reasonable prices on extended warranties, go to carbargains.org and click on Find Low-Cost Service Contracts.

But best of all, just say no
If you think you can handle repairs financially, play the odds that you never will recoup what you spend on that extended warranty. It's hard to disagree with Consumers Union, publisher of Consumer Reports magazine, when it advises that the best protection is to buy a car with a strong record of reliability. Look for a reliability rating for most cars annually in the April issue of Consumer Reports (often available in libraries) or, if you are a subscriber, online.

Jerry Edgerton is an automotive writer whose work has appeared in Money and other national magazines. He also is the author of the book "Car Shopping Made Easy."

Published October 13, 2003