The Worth of Extended Warranties for Cars and the Impact on Car Loans

Car repairs tend to be an unexpected expense that can really break the budget of an average person, particularly those who live paycheck-to-paycheck.  This is why many car owners may think it is worth their while investing in an extended warranty.  What is an extended warranty?  An extended warranty is when a company agrees to cover the cost of one’s car repairs in exchange for an upfront payment, (which usually can be included in the auto loan).  These warranties can last several years.

On the surface, extended warranties sound like an excellent option for a car owner.  However, many times the agreements are really only beneficial to the companies selling them.   Why is this so?  It’s mainly because extended warranties tend to be costly, especially since consumers usually have to pay several hidden fees.  Most of these hidden fees come in the form of powertrain and other car component expenses and deductibles. 

Additionally, many times extended warranties may deny coverage for repairs that someone may expect to have been included.  This is particularly the case for extended warranties that are sold from independent companies versus those offered from dealerships.  Either way, if a repair is not covered by the extended warranty, the consumer must pay for the expenses out of their own pocket.  Sometimes there are exceptions to the rule if an inspector deems the repair coverable, but the process of inspection could take weeks.  Whether or not there is an extended warranty or not, while the car is out of commission the car loan payments will still have to be made.

This is not to say that one should always forgo the extended warranty.  For instance, if a consumer is buying a car model that is newer and not as established in the marketplace, there is no accepted history on reliability or figures for average costs for replacement parts and labor.  In these situations the best extended warranties are the types that come from the car dealership directly.  Salesmen will try to push consumers toward independent extended warranties, but this is only because these types of warranties offer them more commission… they are not better for the buyer.  Coverage is less and dealerships aren’t as familiar or less concerned with their terms when it comes time for fixing the car.

In terms of how long warranties last, most will average around three years.  Some will offer better deals that range from five to even seven years.

If a person wants to avoid getting an extended warranty all together, they should invest in vehicles created by manufacturers with proven track records.  Indeed, if a car is built well to begin with, the chances of it breaking down are much less.  Yet, there will still probably be something that needs to be taken care of until a person is ready to trade it in or sell it. 

This is why consumers need to set aside several hundred dollars I emergency savings so that if something happens to their car their budget won’t receive too much of a shock.  And for many this amount will end up being much more affordable than what they would’ve paid with an extended warranty.  It almost all cases an extended warranty is a very profitable contract for the seller of the warranty and losing proposition for the consumers that buy into one of these contracts.

Tags: Car loan, extended warranty, warranty

This entry was posted on Wednesday, January 28th, 2009 at 10:53 am and is filed under Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.