Choosing a Warranty that Works for You

Would a large, unexpected car repair bill represent a major problem for your budget? Could you easily handle an $800 control module replacement, a $3,000 transmission rebuild or a $5,000 engine repair? Your answer could determine whether or not an extended service plan, often called an extended warranty, makes sense for you.

"Cars are the only thing left that people still repair," says Ken Schmitz, business manager at Mitchell Chrysler-Dodge-Ram in Simsbury. "I wouldn’t take [an extended service plan] for a clock radio or a microwave oven, but for a car, an unexpected repair can be catastrophic."

This isn't an exaggeration. I’m constantly hearing from people left in shock by repair estimates. Do-it-yourselfers who fondly remember 99-cent spark plugs and $1.49 windshield wiper blade inserts are often left speechless by the price of parts for today’s vehicles. The module that powers HID headlights can easily be priced at $300 or more. Alternators can be $400 and up. Transmission overhauls that were once $900 can now exceed $4,000, depending on the make and model. Labor rates, even at independent shops, are hovering in the $60 to $100 per hour range.

Extended Warranty Options

New car buyers can expect to be presented with the option of taking on an extended repair plan at the time of the sale. "If you’re only going to keep the car for three or four years and keep the mileage low, you don’t need it," says Schmitz of the extended service plans. He also says an extended warranty might not be beneficial for a person buying a costly luxury car, who, in theory, would be able to foot the bill for an unexpected component failure.  However, other people might not be in this position.

Even luxury car buyers are often left in shock at the cost of repairs, such as one owner who couldn’t believe the $700 estimate for repairs to restore night lighting to his car’s speedometer. Another luxury vehicle owner was in disbelief of the $10,000 estimate to fix an all-wheel drive transfer case failure.

If you could absorb the cost of one of these significant repairs, you may be better off declining an extended service plan. These are insurance products, and as is the case with all insurance, the companies that issue the policies, be they insurance carriers or the vehicle manufacturer, expect to pay out less for all claims than they take in from the sale of all the policies.

Individual payouts, however, will often exceed the cost of the coverage and go far beyond what the policyholder could afford to pay. “I don’t want to face a $500, $1,000 or, heaven forbid, a bigger repair bill,” says Steve Smith, the used car manager at Mitchell Chrysler-Dodge-Ram. Smith owns three cars, all covered by an extended service plan. “People today don’t have the discretionary income to take care of that kind of expense.”

Consider the following before buying an extended service plan:

The automaker’s warranty: Many cars today come with factory coverage that far exceeds the standard 3-years/36,000-mile warranty of the past. Some feature full coverage for four or more years and up to 60,000 miles. In other cases, the vehicle will have a “bumper-to-bumper” warranty from the manufacturer that is good for three or more years and 36,000 or more miles, followed by drivetrain protection that extends well beyond those limitations. Emission systems and some hybrid vehicle components will have additional factory coverage.

A wrap-around plan might make sense for a person who plans on keeping their car for many years. This is an extended service plan that covers items not protected under a manufacturer’s extended drivetrain warranty. Repairs to power windows and sunroof mechanisms, climate control systems and even basic electronic control units wouldn’t be covered under a manufacturer’s extended drivetrain warranty but could be protected by the wrap-around extended service plan.

Your planned usage: Make sure the plan you consider reflects the way you’ll drive. It makes little sense to buy a 10-year/100,000 mile plan if you drive 50,000 miles a year. There are, however, some lifetime plans available.

Know the issuer: Ultimately, any plan you buy will only be as good as the company that stands behind it. Plans from vehicle manufacturers and highly-rated insurance companies are all you should consider.

Know what is covered: Plans that cover everything, with the exception of normal wear, are usually better than plans with long lists of covered parts. If a non-covered part breaks, you’ll pay for the entire repair. And, if a non-covered part breaks and causes the failure of covered parts, you might also be out of luck.

Pay attention to maintenance: An extended service plan does not allow you to skip required maintenance or to abuse the vehicle.

Look for transferability: Being able to transfer any unused coverage on the extended service plan that you have for a modest fee when you sell the car yourself can make that sale much easier.

Know who can do repairs: Do you have to go to the seller, any franchised dealer or can any licensed independent repair facility do the work? Also, will a repair need to be authorized before it can be done?

Know the deductible: Some plans pay all of the cost of covered repairs; others impose a deductible, meaning you will have to pay the first $25, $50 or $100 of the bill.

"Over half our customers get a plan," Schmitz says. "Even the banks like them. It protects them. For many customers facing an unexpected $700 repair, it could mean that they won’t be able to make the car payment that month, so they [the banks] allow adding the contract without getting permission first."