Driving home with a new car — or new to you, at least — is an exciting experience. But the car-buying process can be stressful for some. Getting the best deal requires you to spend time researching what you can afford and comparing different makes and models. When it’s time to discuss the contract, however, many people haven’t spent much time thinking about whether or not they should buy extended car warranties (sometimes called a service contract).
How do extended car warranties work
If you’re buying new, the car may come with a warranty baked into the sales price. But if not, you’ll need to decide if it’s worth it. “Buying an extended warranty is all about your personal tolerance for risk,” says Nick Bratton, automotive journalist and chief operating officer of Global Exploration and Recovery.
Buying an extended warranty is all about your personal tolerance for risk,”
As such, it’s important to weigh the pros and cons of a car warranty to determine whether or not it’s worth the cost.
Compare the pros and cons to make a better decision.
- Cheaper than a breakdown
- You can customize your coverage
- Peace of mind
- It’s a gamble
- Not all repairs are covered
- You may be limited to certain repair shops
Pros of an extended car warranties
It’s much cheaper than a breakdown
The cost of a warranty will differ depending on the dealership and the age, make, and model of the vehicle. One thing is for certain: the cost is usually much lower than what it’d cost you if the car suffers a major mechanical or system failure.
As such, the warranty insures you against potentially crippling expenses down the road. And if you’re financing the car, the dealership rolls the warranty into the loan rather than asking you to pay for it upfront.
You can customize it to fit your needs
Dealerships typically have several warranties from which you can choose. For example, if you don’t want an expensive bumper-to-bumper warranty, you can opt for powertrain instead. You can also decide how long you want the warranty to last.
Peace of mind
Whether or not you can afford expensive repairs down the road, buying an extended car warranty means you don’t need to bother with it. You can rest easy knowing that, if something happens, it’s not your financial problem.
“It’s hard to put a dollar value on [peace of mind],” says Bratton. “Some people just feel more comfortable knowing that the dealer has their back.”
Cons of an extended car warranties
It’s a gamble
It’s impossible to know the future, and you may not ever need the warranty. If this happens, you’re out hundreds or thousands of dollars with nothing to show for it. And if you’re financing your car, you’re also paying interest on that warranty.
Not all repairs are covered
If you’ve ever seen an extended car warranty contract, you know that there’s a lot of fine print. Each contract includes a list of exclusions, which covers the parts, systems, and repairs that the warranty doesn’t cover. Read all the fine print before signing to make sure you’re not spending a lot for minimal coverage.
“Also, warranties can be voided in some cases if you fail to follow service intervals correctly, put the wrong kind of oil or fuel in the car, or install parts that are not factory approved,” says Bratton.
You may be limited to certain repair shops
If the dealership offers a third-party warranty, you have to use the repair shops that partner with the warranty provider. If you’re thinking of moving to a new city, it’s possible that the provider doesn’t partner with any shops in the area at all.
How to decide if extended car warranties are right for you
If you’re not sure if an extended car warranty is right for you, ask yourself the following questions.
1. How long do you plan to keep the car?
The older the car gets, the more likely it’ll suffer from mechanical or system issues. If you’re the type to buy new and keep the car for only a couple years, it’s less likely that you’ll need warranty coverage.
2. Have you done your research?
Some cars are more prone to breakdowns than others. “If I was buying a Toyota Camry, I might not add an extended warranty,” says Bratton. “If I were buying a Range Rover, I probably would.” That’s because the Camry has a great reputation for reliability, while the Range Rover’s reliability tends to be spotty.
When buying a used car, make sure you do your research on the car’s previous repair history. Something makes you believe it could turn into a bigger problem? A warranty may be a good idea.
3. Are you getting the best price?
A dealer may say that the price isn’t negotiable, but it can be if you do enough planning beforehand. Before visiting the dealership, call and ask for warranty pricing. Then, do the same for other dealerships in the area. Knowing that another dealership offers a better deal may be an incentive for the dealer to offer a lower price.
“If the dealer [still] won’t budge on warranty pricing, try to negotiate better terms in other areas, such as extending the factory service plan,” says Bratton.
4. Will you regret your decision?
If you feel like the decision not to buy an extended car warranty will nag at you, it may be worth the peace of mind to pay up. The same goes for the other side of the coin. If you feel pressured to buy it and you feel like you might experience buyer’s remorse, go with your gut.
There’s no right answer
Some personal finance experts are staunchly against extended car warranties. But, just like almost every other financial product out there, there’s no one-size-fits-all solution. Do your research beforehand and consider your risk tolerance. Ask the right questions at the dealership and make sure your decision is an educated one.
To further ensure that you’re making the right financial decision with your car, you should also compare auto loan providers to make sure you’re getting the best rate possible. This free loan offer engine makes it easy to get firm loan offers (and rates) without hurting your credit score. A lower interest rate could even be enough to help cover the cost of a warranty over time.