Are Cars’ Extended Warranties Worth It?

Last month we discussed how to stop car warranty calls, virtually all of which are scams. Apart from these scams, are extended car warranties even worth it when you buy them from a reputable source? The short answer: rarely. To understand why let’s start at the beginning.

What Is a Car Warranty?

Manufacturer’s Warranties / Factory Warranty

Virtually all new cars come with a manufacturer’s warranty, also known as a factory warranty. It obligates the manufacturer to pay for repairs caused by defects. Typically, the warranty expires after a certain length of time or number of miles, whichever comes first. The period of time during which manufacturers must cover these repairs is known as the warranty period.

The warranty period differs from one vehicle to the next. Most new cars actually come with a variety of warranties, each providing different types of coverage. And the different warranties might all have different warranty periods.

For example, a manufacturer might provide a comprehensive warranty with bumper to bumper coverage for the first 3 years or 36,000 miles. The same manufacturer might supplement this coverage with a powertrain warranty for the first 10 years or 100,000 miles. Scroll down to learn more about these different types of coverage.

The vast majority of factory warranties are transferable. Thus, if you sell your car while it’s still under warranty, the new owner will enjoy the same protections you did. But you should always confirm as much before buying a used car because not all warranties are transferable. And the warranty coverage or period may change for secondary owners for those that are.

Extended Warranties / Extended Service Contract

When you buy a car from a dealership, new or used, the salesperson will likely try to sell you an extended warranty. Technically, they’re likely trying to sell you an extended service contract because most car dealers don’t offer actual warranties on their vehicles. Rather, they generally extended service contracts offered by third-party providers. Notably, the dealers get commissions from the sale of these contracts, something they usually don’t tell you.

Many dealers and warranty companies provide multiple coverage options for their “extended warranties.” The most expensive of which might provide more protection than a bumper-to-bumper factory warranty, covering standard maintenance, roadside assistance, and more. Others cover next to nothing and may require you to pay a deductible to receive service.

Regardless of the coverage it provides, extended service contracts are first and foremost designed to make the dealership money. Most cost thousands of dollars and may never need to be used. But even consumers who understand this may still purchase an “extended warranty” with every vehicle because of the peace of mind it provides.

In a sense, extended service contracts are like a kind of car insurance that covers defects rather than accidents. Like insurance, the cost of an extended service contract likely exceeds the cost of paying for service when needed. But in rare cases, the cost of even one unexpected repair might dwarf the cost of the entire extended service contract.

One key difference between factory warranties and extended service contracts is how lemon laws apply to them. We discuss these differences and the coverages provided by different kinds of warranties in the next section.

What Does a Car Warranty Cover?

Manufacturer’s warranties cover the cost to repair specific defects in a vehicle. The kinds of defects covered depend on the specific warranty. In most cases, a manufacturer’s warranty bundles multiple warranties together. Let’s look at some of the most common warranties included in the cost of a new car and what they cover.

Bumper-to-Bumper Warranties

Also known as comprehensive warranties, these cover any defective component of a vehicle. If anything as inconsequential as the radio stops working, the manufacturer will fix it free of charge. The same goes for the engine, mirrors, seat warmers, rearview mirrors, and every other part of the car. Because these warranties provide the most protection, they’re also the shortest.

Like any warranty, bumper-to-bumper warranties do NOT cover accidental (or intentional) damage. And they typically won’t cover cosmetic issues or “normal wear and tear” either.

Powertrain Warranties

Powertrain warranties cover every moving part that helps propel the vehicle. Their warranty periods are typically much longer than most other warranties, more than double that of the bumper-to-bumper warranty for some vehicles.

Drivetrain Warranties

Drivetrain warranties are basically powertrain warranties that don’t cover the vehicle’s engine itself. That leaves the transmission, the axels and wheels, the differential, driveshaft, and CV joints. Most new cars will come with a drivetrain OR a powertrain warranty, not both. Thankfully, either should provide coverage for several years/tens of thousands of miles beyond comprehensive warranties.

Component Warranties for Hybrids or Electric Vehicles

Electric vehicles (EVs) and hybrids have a number of parts not found in traditional gas guzzlers. Thus, some come with component warranties to cover these parts, such as the electric motor and battery. Electric motors are shockingly dependable. As a result, their warranties enjoy incredibly long durations, though it’s unlikely you’ll need to use them.

But like any rechargeable battery, those in hybrids and EVs degrade over time and with use. And replacing the battery in an EV typically costs several thousand dollars, making it one of the most expensive repairs for any kind of car. So if you’re shopping for a hybrid or an EV, read the fine print of the component warranty carefully.

Warranties and Lemon Laws

Lemon laws were designed to prevent consumers from getting stuck with cars that don’t work the way they should. If a manufacturer fails to fix a warranted defect after a reasonable number of attempts, state or federal lemon laws typically require them to replace the vehicle or refund the purchase price.

The exact provisions of these laws vary from state to state. And the federal Magnuson-Moss Warranty Act provides protections nationwide, which are similar to those outlined in lemon laws.

However, the vehicle’s defect must be covered by a written warranty for almost any of these laws to be applicable. Defects covered only by extended service contracts are almost always excluded from coverage under state lemon laws. But they do provide some very important protection under federal law.

In particular, if you purchase any consumer product that is accompanied by a written warranty or service contract within 90 days of your purchase, the federal Magnuson-Moss Warranty Act forbids the seller of your product from disclaiming some very important warranties that are “implied” in law. These warranties govern the overall fitness of your vehicle and require that the vehicle be “merchantable” or of a level of quality you would expect from another.

Should I Buy an Extended Warranty on a Used Car?

Probably not unless the vehicle is being sold “as-is” without the balance of a factory warranty. For the vast majority of consumers, “extended warranties” are a waste of money. This holds true for both new and used cars. In most cases, the cost of the extended service contract alone will be more than the total cost of any car repair or maintenance bills.

But we never recommend that you buy a car “as-is” without any warranty. In those instances, purchasing an extended warranty or service contract may be the difference between you being able to enforce your legal rights or not.

Plus, a $5,000 “extended warranty” may cost you more than just $5,000. If you plan to finance your vehicle, you’ll pay interest on the cost of both the service contract and the vehicle. The interest alone could cost you hundreds of dollars. And if the service contract includes a deductible, you’ll pay even more if you ever plan to use it.

Although it’s rarely a smart idea to get an “extended warranty,” sometimes doing so makes sense. If the model of the car you’re interested in is known for needing expensive repairs, it’s worth at least considering a service contract. Check consumer reports for unbiased reliability ratings for your specific make, model, and year to help you decide.

And if the service contract is priced low enough, the peace of mind it provides might be worth the cost. The cost of the services you receive might not justify the cost of the “warranty.” But it’s much easier to budget for a regular monthly bill than an unexpected repair. And knowing that you’ll never be faced with a surprise bill is worth something, too.

If You Need a Service Contract, Negotiate

Whatever your reasons for purchasing an “extended warranty” may be, always negotiate the price. If you’re buying a service contract and a vehicle together from the same dealership, flatly reject the first warranty offer. The salesperson will almost certainly persist, explaining the expensive repairs it could save you from. Continue rejecting their offers without showing interest.

Eventually, the salesperson will begin to drop the price. In many cases, the first price you hear will be more than double what the dealership would accept. Continue to feign a lack of interest until you hear a price that you’d be willing to pay. Don’t make counteroffers.

If the salesperson never offers a price in your target range, keep the vehicle sale moving. When it comes time for you to sign on the dotted line, the salesperson will likely try one last time to sell a service contract. If the offer sounds reasonable, take it. If not, reject it or make a counteroffer.

If they fail to make a final offer but you’re still interested, casually ask if they would accept an amount significantly lower than you’re willing to pay. Commission rates are usually much higher on services than they are on physical goods. So salespeople have a huge incentive to accept any reasonable offer. And if you can’t reach an agreement on price, you can always purchase the “extended warranty” at a later date or from a different company.

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