Some people buy a new car extended warranty to reduce financial stress and give themselves peace of mind. But, as with any product you’re considering purchasing, doing your research on the specific warranty is vital. There are a lot of variables in play, from the length of coverage to the cost. And, the slew of options can be confusing.
There are multiple options for an extended warranty, including dealerships, auto clubs and insurance companies (also known as mechanical breakdown insurance). And they vary in price, terms and coverage. For example, some warranties include a depreciation clause, which reduces the amount paid toward repairs based on mileage. Others may have service requirements, such as only allowing the vehicle to be repaired at certain facilities. Many of the plans also have deductibles, which the owner must pay out of pocket before the warranty kicks in.
The main issue with an extended warranty is what it covers. While it can be marketed as “bumper-to-bumper,” it’s important to read the fine print and figure out exactly what it includes and excludes. For instance, some warranties only cover replacement parts rather than repairs, which can be significantly cheaper. It’s also essential to understand who administers the warranty. Oftentimes, it’s simply a dealer-sponsored or manufacturer-backed warranty that’s added on at the time of purchase. Other times, it’s a standalone plan from an independent provider like CarShield or CARCHEX, which we recommend shopping around for before making a decision. Both are well-reviewed with 4.2 stars or higher on Trustpilot and have excellent customer service.
If you can’t afford to pay for an unexpected car repair out of pocket, an extended warranty could be worth the extra expense. But, if you’re buying a reliable vehicle with an established track record and no major recalls, it might be better to skip it altogether. Instead, Ramsey recommends creating an emergency fund for car repairs and saving the money you would have spent on a warranty. You can always put the funds into a savings account for when you need to replace the car, or apply them toward your next vehicle.
Another thing to keep in mind is that many dealers will pressure buyers into an extended warranty as a condition of financing the car. This is a blatant sales tactic, and you should be sure to do your research on both the dealer and the warranty company. It’s also a good idea to shop around for the best prices on an extended warranty, which you can do online from the comfort of your home. Some companies will even provide a quote for free. Just be sure to factor in any additional perks, such as roadside assistance or rental car reimbursement.