Some car buyers want extra protection, but these plans aren’t for everyone
By Jeff S. Bartlett
Car buyers crave reliability: 95 percent of new- and used-car shoppers rank it high when choosing a car, according to a national survey conducted by Consumer Reports. But for many shoppers, even knowing which cars are trustworthy isn’t enough. They want protection.
Vehicle service contracts, often referred to as extended warranties, are a tempting option for consumers who buy a used car or for those who want to extend the bumper-to-bumper coverage on a new car. These are typically included with certified pre-owned cars sold by dealerships, along with an extensive inspection. (Read about Honda extending its certified pre-owned status to 10-year-old cars.)
No matter the exact type, extended warranties are an investment in peace of mind that limits financial risk for a set period of time. But beware: A CR member survey conducted in 2013 showed that car owners typically paid more for the coverage than they got back in direct benefits. This isn’t surprising, because extended warranties make a lot of money for those who sell them.
“The fact is, extended warranties are overpriced. That’s the reason people sell them, because they make a bundle on them in commissions,” says a money expert and radio talk show host, Dave Ramsey. “I don’t recommend buying extended warranties, ever. If you can’t afford to repair your car, then you can’t afford the car.”
Instead, Ramsey recommends that owners create an emergency fund for repairs that they can tap into when needed. And if that money isn’t needed for repairs, it can go toward the purchase of the next car.
If you do want to purchase an extended warranty, remember that the price can be negotiated, just like the purchase price for the car.
Extended warranties may reduce financial stress, particularly for those who own models from unreliable brands. They’re available through dealerships, auto clubs, and insurance companies (which sometimes call them mechanical breakdown insurance). The plans can vary in length of time, what they cover, and price. And the small print truly matters, because aftermarket programs have specific limitations on what repairs are covered and where the work can be done.
The best time to purchase protection for newer vehicles is while they’re still under the original factory warranty, according to AAA. This helps keep the cost down, and you can get a greater selection of longer coverage terms.
For those driving used vehicles, usually the best coverage options are for vehicles with under 80,000 miles. The club recommends that used-car buyers factor in how long they plan to keep the car, how many miles they drive annually, and whether they can afford to pay for repairs out of pocket. AAA’s average claim is $850.
The national auto club offers a vehicle service contract that combines warranty protections with extra services, such as battery replacement, trip reimbursements, and rental-car coverage. AAA told CR that 30 to 40 percent of its customers require at least one covered repair.
From a pure numbers standpoint, the smart money is on skipping the protection and instead focusing on buying a model with better-than-average predicted reliability, and then properly maintaining it. Before buying a new or used car, check our reliability ratings.
If you do want to buy an extended warranty, be sure to purchase one from a company with a long history, such as through an automaker, and understand the small print. There are often many restrictions with extended warranties, including what’s covered and where the vehicle can be serviced.
Robocalls pitching extended warranty services are rampant. We recommend being skeptical of any cold call offering such protection.
Editor’s Note: This article has been updated since it was first published on Dec. 27, 2018, in the February 2019 issue of Consumer Reports magazine.
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