First, let’s define what an extended warranty is.
According to a Bankrate.com in the Straight talk on extended warranties article, “An extended warranty is actually an extended service contract” for covering repairs after the factory warranty expires. A feature article by Staci Giordullo, Are Extended Car Warranties a Scam? in the October 16, 2012, Angie’s List describes the term “extended warranty” as a misnomer. “A warranty is a guarantee from the manufacturer of a product to repair or replace it within specific amount of time and it’s included in the price.” The list also states an extended warranty is really a “service contract” that is sold separately for additional time (years and miles) at an additional cost.
The Service Contract Industry Council, a national trade association, works with lawmakers across the country to develop fair and uniform regulation in the automobile service contract industry to protect consumers. Currently 37 states require specific registration and financial backing of the service contracts regardless of the seller of the contract and the administrator (claim adjuster).
Types of Extended Service Contracts
It’s also important to know there are two basic types of extended service warranties. Bankrate.com identifies the types as factory-backed service contracts from the manufacturer of the vehicle and the aftermarket (or third party) warranty from an independent company with no direct relationship to the product it covers.
Edmunds, Inc., a car shopping advisor, in the article Five Questions to Ask before You Say Yes to an Extended Warranty, reports that automakers stand behind their warranties through dealerships across the country. The Staci Giordullo article emphasizes that ASE certified technicians are required to perform factory-backed contract repairs, or under emergency situations, the car owner must follow the contract’s stipulations for using specific repair facilities by getting approval from the manufacturer. “An extended service contract backed by an auto manufacturer is probably the safest bet,” states the Bankrate.com article, because these warranties encompass a wide range of repairs at authorized dealerships nationwide with direct approval. Two of best factory-backed manufacturer agreements are Mopar Vehicle Protection Service Contracts and Ford Protect Extended Service (ESP) Plans.
Third party or aftermarket extended warranty coverage and quality varies widely, according to the Staci Giordullo article. Edmunds, Inc. also suggests third party warranties from companies sold by dealerships provide varying reliability and satisfaction to consumers. The third-party repair network (what garages are authorized to do repairs) in what parts of the country and pay upfront/reimbursement policies vary greatly, according to Bankrate. Some individual dealerships also offer their own dealer warranties, but these contracts may require that customers have all repairs done at that single dealer. The top three third party administrators are Automobile Protection Corp., Advantage Warranty Corp. and Underwriters Service Corp.
Questions for Determining If Service Warranty Needed
Bankrate.com, Edmunds and Consumer Reports all advise you answer several questions before deciding to research and buy an extended service contract.
How long do you plan on keeping the vehicle after the original warranty expires? If you buy new vehicles, or trade cars within three to four years (while the vehicle is covered under the original factory warranty), it makes no sense to purchase a service contract. On the other hand, if you plan on keeping the vehicle for a long time after the original warranty expires, you should ask yourself a few questions about the need for a service contract.
Are you concerned about pricy electronic, engine or transmission expenses? In an August 28, 2015, article, Are extended car warranties worth it?, Clark Howard, of the How to Save Money radio show, suggests that if you can be disciplined enough to put the same amount of money every month into a savings account as it takes to finance an extended warranty, you might be better off. The Consumer Reports article, Extended car warranties: An expensive gamble, also recommends creating an emergency fund in an interest bearing account for unexpected auto repairs.
Consumer Reports, however, further mentions, “Extended warranties can limit the risks of expensive surprises. Clark Howard also says, “If you are worried about extreme out-of-pocket expenses from repair bills for old cars, I recommend you buy the manufacturer’s own extended warranty. … Be sure it is the manufacturer’s own.”
Factors to Consider Before Buying A Service Contract
According to a J.D. Power study, vehicle dependability has been improving since 1989. Edmunds, Inc. suggests researching the reliability information of used or new vehicles in Edmunds, Consumer Reports or other vehicle sources. Also, compare your own vehicle repair expense (out-of-warranty costs) vs. the cost of a service warranty and expected deductible costs. Bankrate.com points out that reliability of high repair costs on new vehicles are largely based on complex electronics and computer circuitry along with the powertrain performance.
Independent third party warranties may cost half as much as factory-backed, but the best extended service contract value is a factory-backed contract sold either face-to-face (at higher prices) or online (at a discount), as reported in the Angie's List article, Are Extended Car Warranties a Scam? Above all, do not buy under pressure, read the contract before signing and beware of unsolicited mail, email or phone offers. So, as also mentioned in Are Extended Car Warranties a Scam?, “Remember, an informed consumer can’t be taken advantage of.”
The Edmunds article recommends doing further research on the different levels of coverage and weighing the benefits of the different extended warranty products to your vehicle situation. You need to know the coverage details, deductibles, vehicle reliability, and how repairs are approved and paid (Avoid upfront payment policies for repairs.). It is also important to negotiate the price, especially when making face-to-face purchases, because car dealers have varying asking prices.
Finally, you do not need to buy an extended service warranty when you buy the vehicle. Edmunds notes you may purchase a “warranty any time before the manufacturer warranty expires” for a lower cost. Edmunds also affirms you may purchase a “warranty after the manufacturer warranty expires” for a slightly higher expense. Bankrate.com further suggests that you shop for a service warranty within the first year of vehicle ownership when the prices are the lowest.
A Consumer Reports extended service survey found little difference in the cost between limited coverage and bumper-to-bumper coverage. The survey also showed that purchasers of an extended warranty who opted for bumper-to-bumper coverage were more satisfied than those who bought other less comprehensive plans.
So, if you’re going to buy an extended service warranty, the findings suggest you get full protection for long-term ownership of your vehicle. Mopar Vehicle Protection Maximum Care and Ford Protect ESP PremiumCare are two of the most comprehensive factory-backed extended service warranties on the market.
Learn more about our full range of Mopar Vehicle Protection plans today.