Ask Stacy: Should I Buy an Extended Car Warranty?

Money Talks News

This week’s reader question is about purchasing peace of mind.

We purchased a 1500 Dodge Ram four-wheel drive a year ago this December and want to know if it is worth buying an extended warranty. We currently have a little over 10,000 miles on it.

Extended warranties — also known as service contracts — are pushed heavily by car dealers, with good reason: They make a lot of money on them.

But these contracts also provide some assurance that if some gigantic repair rears its ugly head, your savings will remain intact.

How do you decide? Start by asking yourself these questions:

1. How reliable is my car?

If you’re unfamiliar with your particular type of vehicle, do some research online and see what others are saying. For example, check out the reliability rating for the 2010 Dodge Ram 1500 pickup here.

I’m shopping for a replacement for my 13-year-old Mercedes. I was recently looking at a 2009 model, and the Mercedes salesman said, “One advantage to buying one of our certified used cars is your ability to buy an extended factory warranty.”

My response? “The reason I’m looking at another Mercedes is, they don’t break. If they did, we wouldn’t be having this conversation. So it’s unlikely I’ll be paying thousands to extend the warranty.”

2. What does it cover?

The words “extended warranty” don’t mean a thing until you know exactly what’s covered and what’s excluded. Like health insurance, many warranties come with different coverage levels and deductibles. Some are bumper-to-bumper, covering virtually everything. On the other end of the spectrum is a contract covering just the powertrain (engine and transmission).

Before considering any level of service, read the fine print, comparing what’s covered with each one, as well as the deductibles.

Once you’re clear on both coverage and out-of-pocket cost, compare them with your life experience. In other words, if the warranty covers only the engine and transmission, how many of those have you had to replace?

I’ve lost engines and transmissions in the past — but only on cars way beyond any warranty, extended or otherwise.

3. Is it from the manufacturer or a third party?

Manufacturers’ extended warranties will generally cost more than third-party service contracts, but they offer advantages. For example, your car will be repaired by factory-trained technicians using authorized parts. You probably won’t have to get approval for repairs, or pay for them up front and wait for reimbursement. And you’ll typically be able to transfer the warranty if you sell the car.

Here are links to a variety of manufacturer warranties. Click on them to see what’s covered:

  • Acura
  • BMW
  • Buick/Cadillac/Chevrolet/GMC
  • Dodge/Chrysler/Jeep
  • Ford/Lincoln/Mercury
  • Honda
  • Jaguar
  • Mercedes-Benz
  • Mini
  • Nissan
  • Subaru
  • Toyota
  • Volkswagen
  • Volvo

4. Did you shop it?

If the dealer is successful in convincing you to buy an extended warranty, that doesn’t mean you should pay the asking price. According to Edmunds.com, dealers typically mark up manufacturers’ extended warranties by 100 percent, so there’s plenty of wiggle room.

When it comes to third-party warranties (which dealers may also offer), do a search for “extended car warranty,” and you’ll find a surprising number of options. A small sampling:

  • Costco
  • AAA
  • USAA
  • Credit unions
  • Car insurance companies (This link goes to Geico, but check with whichever company you use.)

Always get several quotes, and when it comes to a dealer, don’t pay the asking price.

5. Will it buy you peace of mind?

There are two distinct types of people in the world: those who can’t stand the idea of unexpected expenses, and those who can’t stand the idea of paying for protection they may never need.

I’m in the latter category.

When it comes to something like health insurance, I don’t have a choice. Without it, I could lose everything if I become catastrophically ill.

When it comes to my car, however, there’s nothing covered by an extended warranty that will bankrupt me. So I’m willing to gamble. And these days my odds are better than ever, because cars are more reliable than ever.

My philosophy: Insurance is to prevent financial catastrophe, not inconvenience. If you insure yourself to the extent you’ll never lose money, you may never have any money to lose.

I keep my insurance deductibles high, I don’t buy extended service contracts, and I keep a fat emergency fund. So far it’s worked out for me.

Bottom line? Unless you’re the nervous type or have had negative experiences by going without, you’ll probably be better off taking the money you’d pay for an extended warranty and investing it instead.

But if you’re going to get this type of coverage, read the fine print, then shop it hard.

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

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This article was originally published on MoneyTalksNews.com as 'Ask Stacy: Should I Buy an Extended Car Warranty?'.

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