Wednesday, September 8, 2010

Extended Warranties Exposed

Ever wonder if an extended warranty is worth buying?
There are definitely mixed opinions on this question. Hopefully I have some answers for you.  Most people who will tell you that extended warranties are not worth it have had a bad experience with them because they had issues with their coverage.

Most people have no idea what kind of coverage they really purchased. All most people remember 5 years later when they go to use the extended warranty is that the finance person that sold it to them said that “everything was covered bumper to bumper” - Wrong!!

The finance person knows that it is unlikely that you will ever read your contract until after you have an issue with the contract which could be 3 years later. Knowing this he may not give reliable information when he is selling you the contract.

If only those people knew a little about extended warranties beforehand…. ‘’

Don’t let the finance person scam you?
Remember take whatever the finance person tells you with a grain of salt! You should know that the finance person gets paid on a COMMISSION!! So naturally he will try and make as much additional profit on you as he can without loosing the deal.

Just remember that when they are selling you an extended warranty they are trying to make as much extra money on the deal as possible. That means telling you how great that crappy warranty is and charging you an over inflated price for it. Don't be scammed, read on.

What is the best type of extended warranty to get? 
First thing you need to know is that there are several different types of policies out there with different levels of coverage, deductibles etc. There are manufacturers extended warranties (sold through Honda, General motors, Ford etc..) and there are what I call aftermarket warranties (all the others).

My first preference would be the manufacturers extended warranties. This is by far your best choice especially if you plan on servicing your vehicle with the dealership – this is not a requirement by the way. You also do not need to worry about them going belly up because they are backed by the manufacturer.

If you want the added convenience of having repairs done at most any repair facility then think about the aftermarket policies. Typically they offer the flexibility to have repairs done at most national chain repair facilities (why would you do that?!?) and they may also let your local small garage do repairs (you better check with your local shop first and also check with the extended warranty company directly, do not take the finance persons word for it, trust me on this!).

A big issue with aftermarket is that many of these companies do go belly up and when they do some times people are left high and dry with no coverage at all (and I have seen this happen several times). So make sure any extended warranty policy you are considering has been around for a long time and is reputable. Check and see who the Administrator and the Underwriter is for the extended warranty and check there credentials. Also are they back by a insurance company if they do go under? (see the end of the article for a couple useful links)

One thing I highly advise is that if you know what dealerships you will be shopping at call them and find out who they do use as an extended warranty and see what info you can get on the company. Do your research, BEFORE you go to the dealership! Always be prepared!!

Beware! Watch for this clause
First make sure there are no limitations on where you can take your vehicle to have repairs done. This is important because some contracts specifically state that you have to bring your vehicle back to the selling dealership for repairs if you are within 50 miles of that dealership (mileage limits may vary).

This is important because if there is another dealer closer to your house that you want to service your vehicle there but they are within the mileage range of the selling dealership, you will need to go back to where you purchased the vehicle to have repairs done.

What do you mean “I have to pay up front?”
Second is how does the extended warranty pay for their claims?? This is important because all of the shops I have worked for will NOT wait to be paid. So if the extended warranty company does not pay for the repairs over the phone with a credit card, one of two things will happen

Either the shop will not deal with the extended warranty company at all or they may set up the claim but you will pay for the repairs and have to wait the 4 to 6 weeks to get reimbursed from the extended warranty company. Some aftermarket policies may reimburse you directly whether you like it or not.

Once again don't trust the finance person on this one. Read the contract or call the extended warranty company directly and ask!!

What is the BEST plan to purchase?
Third thing to consider is the level of coverage you want. I suggest taking their best plan which will typically be a full coverage policy. You will spend more money but there will be no questions as to what is covered and what is not. Be careful also because the finance person may only offer you one or two options typically the one that makes him the most money in commissions.

Just remember that full coverage does not mean bumper to bumper, there is no such plan. When the finance person is trying to sell the policy they like to use this term, so be cautious! Take a close look at the contract, there will be a list of items that are NOT covered. A full coverage policy will cover everything else that is not on that list and it will be stated as such. (Refer to the bottom of this page for a list of items typically not covered by any policy)

If it is not on the list it’s not covered
All the other extended warranty policies are itemized, which means that they have a list of covered components for that policy. Each component will be listed under separate headings such as: Power train - All internally lubricated components, pistons, pins & rings; rods & bearings; crankshaft & main bearings; etc. etc. Electrical - Starter motor, window motors; wiper motors etc. the list goes on.

So if the component that is broken on your vehicle is not listed on the policy, it is not covered! No exceptions, period. I have seen things listed on these contracts that do not even exist on today's vehicles! I suggest avoiding these type of warranties all together, you will be very upset the first time you have a concern and find out it's not listed under your plan (if only you had gotten the full coverage policy!!).

One thing to note is that when you are purchasing a used car sometimes depending on mileage you may not be able to purchase full coverage. In this case get the best policy possible and read through what is and is not covered. I always suggest considering an extended warranty contract when purchasing a used car (trust me on this), you never know how that vehicle was maintained before you purchased it and 99% of the time neither does the dealership. (Read The Truth about Used Cars)

Stay clear of “Mechanical Breakdown" warranties
Whether you get a full coverage policy or a it is itemized you need to make sure that you are covered for both wear and tear and mechanical breakdown. This is important because most failed parts fail because of wear and tear. So be sure that the contract you are looking to purchase specifically states that even if a part fails because of “Wear and Tear” that it is covered.

What do you mean, Deductible??
Fourth thing to look at is the deductible. Deductibles will typically range from $0 up to $250 per visit - be sure that it is per visit and not per repair!! Per visit means that if you have 6 issues that need to be repaired during that visit you will pay just one deductible. This is the only way to go; paying per item is a rip off, period!

I suggest not taking a deductible more than $100. Obviously it will cost more for the contract the lower the deductible. So you need to decide what deductible is worth it for you. Keep in mind the average cost to repair a vehicle can  range easily from $250 up to $500 (and trust me it can go much higher all depending on the issue with your vehicle - we will talk about this later).

Do you know what your extended warranty start date is?
Fifth thing to consider is the length of the contract. This will vary between new cars and used car policies. Typically new car coverage will go from 5 to 7 years (there are some policies that go up to 10 years) from the original owners purchase date (if you’re the second owner it still goes by when the original owner purchased the vehicle). Mileage can go up to 100,000 miles. So judge how long you typically keep a car for, as to how long you want your coverage.

Used car warranties will typical be from 12 months up to 4 years from the date you purchased the vehicle. Mileage will typically go up to 48,000 miles from the mileage that you purchased the vehicle at. Used car policies will vary greatly depending on how many miles the vehicle had when you purchased it. The more miles the vehicle has the less coverage you will be able to get (and the more expensive it will cost).

Did you know all the extras have limits?
All extended warranties have some extra types of coverage. Look these over good and make sure you know what you’re getting. Most will offer some type of towing provision. Most policies will only cover a portion of the tow bill, the average policy will cover $50 toward your tow bill (most tow bills will cost between $80 to $120). If it covers more than great, make sure you see it in print - once again don't trust the finance person!!

The next most common extra add on is rental coverage. This coverage can be deceiving, so be sure you know exactly how it works. For example; Some policies will only cover rental expense if the repairs take more than a certain amount of hours (typically 8 hours), they determine this by how many hours a repair pays not how long it takes the shop to complete the repairs. Most policies will not pay for parts delays. So if the part has to be ordered from out of state and it takes 3 days to get it, you will not be covered. Last thing to understand is that all extended warranties will only pay a set amount per day up to typically 5 days. The average per day they will pay is normally $30 (most rentals start at $30 and go up from there)

These extras may vary greatly from policy to policy. The three items I listed here are pretty standard with any extended warranty. Many extended warranties will have other types of added coverage so just be sure to read through the policy so you know exactly what you are getting and how these extra’s truly work.

Here is a list of items that are typically never covered by any extended warranty:

Sheet metal, body parts, panels, bumpers
Chassis frame, cross members
Hinges (door, rear hatch, etc.)
Trim, body and moldings
Paint, rust damage
Convertible and vinyl tops
Carpet and upholstery
Exhaust component and catalytic converter
Lenses, sealed Beams, light Bulbs
Brake drums and rotors
Shock absorbers,
Rubber bushings
Squeaks, rattles, wind noise and odors; adjustments
Rubber hoses; coolant hoses and vacuum hoses

Any maintenance items are not covered: Spark plugs, brakes, clutch lining, filters (air, oil, hepa etc.), fluid changes (transmission, engine, coolant etc.) that are part of normal service work, timing belt (may be covered if breaks prematurely), etc. Hopefully you get the picture. Read the contract for a complete list of items that pertain to that contract, it will be itemized. Remember this is a legal contract so it will be very specific!

Why are maintenance records important?
Remember to always keep all of your maintenance records! If you have any major type of failure that will cost big bucks, they will ask you for all the records that pertain to the failed component. So if your engine blows up they will want to see all of your oil change records. If you are missing any or you are always late changing oil, they may decline to do repairs. It is their right. I have had people argue about not being covered and they have no records of their oil changes. Why should the extended warranty pay?? They do not know that you maintained your vehicle properly, would you pay? So keep all your records and take care of all your services per your owner’s manual. I suggest following the severe maintenance schedule to be safe, it applies to 80% of all drivers out on the road today!! Follow the maintenance as close as possible. If you don't and you have issues you have only yourself to blame. For those of you who like to service you own vehicle, I would suggest not. But if you do then call the extended warranty and find out exactly what records they want. If you do not do what they say you will have issues, better safe than sorry.....

So how much should you pay for an extended warranty?
There is no easy answer for this. I can tell you that now a days most contracts will cost somewhere between $1000 to $2500 depending on the type of coverage and several other factors. I have seen at the dealership some contracts that were as high as $3000. Would I pay $3000 for an extended warranty, heck no? Figure that the dealer will typically double the price of the extended warranty contract from what their cost is. One thing to remember is that if you are looking at the manufacturer’s policy the dealership is typically limited to how much they can mark these up. So you will have less negotiating power.

When you are negotiating price I suggest starting your bid at half of their original quote and go from there. Chances are you will be able to meet them somewhere in the middle.  

If they do not budge much on the price you need to judge if it is worth the extra expense (plus the convenience of rolling the cost into your loan). One other thing to consider is if you are looking at the manufacturers extended warranty they typical are cheaper than the aftermarket warranties that they offer. This is because the dealer is only allowed to mark it up a certain percentage, this is the reason most dealerships will not even mention these warranties because they are limited to how much profit they can make (remember the finance person is making a commission off this sale!). If you ask them about it they must offer it to you (if they don't just walk out the door and get on the phone with the manufacturer, they might like to hear about it - doubtful that you will make it out the door though).

Here's another tip: When you're buying an extended warranty with a new car, dealers generally talk in terms of monthly payments, not the total cost for the warranty. In order to really know what you're paying, ask for an itemized cost of everything on the vehicle, including the total cost of the extended warranty.

Have some ammunition for the finance person
Before going to the dealership I suggest going online and checking with a couple extended warranty companies. This way  you can check out prices before you go buy a vehicle (it will help also if you have an idea of what kind of car your looking for). Print whatever info you can about their coverage and bring it with you. You can also call ahead of time to the dealership you are planning on visiting and asking them questions about the extended warranties that they sell. This way you have some ammunition for the finances person when you start talking about extended warranties. The finance person is prepared shouldn’t you be??

Extended warranty = Peace of mind
Ultimately extended warranties are basically insurance policies that are meant to protect you from unexpected repairs. Do you need one?? You never know for sure, but it is nice to have peace of mind for all of us that have a hard time parting with $500 to get our vehicle repaired because of an unexpected break down. If you buy a new car and plan on keeping it for several years it's a smart investment.

You never know how a used car was treated before you purchased it
Remember a large percentage of used cars are purchased by the dealer through auctions - Many of these vehicles were fleet vehicles which tend to get bare minimum maintenance by whomever the fleet company was – typically a rental car company. The point here is that there is really no way to know how a used vehicle was treated before you purchased it, so why take a chance?

(**Many used car warranties have a clause that coverage will not start until after the first month or 1000 miles, whichever comes first!! So I suggest asking what happens if you have an issue before the contract becomes effective and get it in writing!!)

Extended warranties is a binding legal contract
Remember to always read through the contract so you know what you are about to sign. Check through the five items we talked about earlier. It’s  good practice to check into some extended warranties companies online before you go to the dealership so you know what to expect and you can make good decisions and be prepared! It's not like you can go back after you buy the vehicle and back out of the deal.....We have a saying in the business that once you sign those papers you’re an owner!

If you have any questions about extended warranties or anything to add please feel free to e-mail me I have dealt with just about any situation you can think of!

The Automotive Wise Guy

List of financially stable Service Contract Underwriters
List of Extended Warranty Administrators – this list is from 2004 but is still a great resource

Manufacturer extended warranties

Acura, Audi, BMW, Buick/Cadillac/Chevrolet/GMC/Saab, Dodge/Chrysler/Jeep, Ford/Lincoln/Mercury, Honda, Hyundai, Isuzu, Jaguar, Land Rover, Lexus, Mazda, Mercedes-Benz, Mini, Nissan, Subaru, Toyota, Volkswagen, Volvo

Get your FREE extended auto warranty quote!

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