Drive Time
Warranty Warning
You must read the fine print on your car warranties.
By Jessica L. Anderson, Associate Editor, Kiplinger's Personal Finance
December 2009
John Pallay of Mansfield, Ohio, found out the hard way that automobile extended warranties can be a raw deal. Pallay recently wrote to Kiplinger’s to relate his tale of warranty woe: When he bought a used 2002 Pontiac Sunfire nearly three years ago, he also bought a $2,000 extended warranty from National Auto Care (now called NAC). Since then, Pallay writes, he has shelled out $1,400 for repairs-and his policy has paid just $30. Some parts that needed replacement were excluded from coverage. Other repairs weren’t covered because the breakdown was caused by a noncovered part.
Hit and miss. Extended warranties consistently inhabit top-ten lists of consumer complaints for a good reason: They often make it difficult to cash in. The language may, for example, obfuscate what is covered and what isn’t so that you end up footing the bill instead of the company backing the contract. The fine print may include a per-item deductible instead of a per-visit one, meaning you could rack up several deductibles in one trip to the shop. Diagnostic fees may not be covered if the part that’s found to be causing the problem isn’t covered. The reimbursed labor rate may be less than what your shop charges. And the warranty may be subject to termination if you don’t follow its maintenance schedule.
Some high-profile warranty companies have gone bankrupt, leaving customers in the lurch. And some 40 state attorneys general have investigated a massive phone and direct-marketing campaign that was waged last year. The companies involved sent out mailings that appeared to be from a car dealer or manufacturer to sell often-worthless warranties.
If those caveats don’t scare you off, the high cost of extended warranties may. According to F&IMagazine, a publication for auto dealers, a typical extended warranty costs an average of $1,790, and $795 of that is profit for the dealer. And in a 2007 survey by Consumer Reports of new-car buyers who bought extended warranties, 42% never used their contracts because their vehicles didn’t need repairs that weren’t covered by the factory warranty.
Should you ever buy one? If you plan to keep your car for no more than a year or so after the factory warranty ends, an extended warranty is a losing proposition. But if you plan to keep your vehicle till the wheels fall off, or you’re buying a used luxury car outside of a certified pre-owned program, an extended warranty might make sense. You will pay less if you purchase it when the car is new. For example, a top-of-the-line contract for a new Mercedes E350 from EasyCare-an administrator for several manufacturer plans that also sells warranties to individuals-would cost $2,527 and cover repairs until the odometer read 100,000 miles. The same coverage for a used 2005 E-class Mercedes with less than 60,000 miles would cost $3,082 and cover another 50,000 miles.
If you take the plunge, shop hard. Philip Reed, of Edmunds.com, recommends manufacturer plans over third-party ones. They may cost more, but they tend to have fewer loopholes. With a third-party contract, check out the administrator’s complaint record with the Better Business Bureau. For example, NAC is rated B and is not accredited by the BBB, but EasyCare gets an A+ and is accredited. That means the company has committed to make a good-faith effort to resolve complaints.
Read the contract-all of it. Also be sure to steer clear of warranties that require you to pay for repairs upfront; it-s better if the dealership is paid directly. Finally, haggle for a lower price. The Consumer Reports survey found that 75% of people who negotiated won a discount.
If you do sign but develop buyer’s remorse, don’t throw up your hands. In most states, you have the right to cancel within 30 days of signing a contract if you haven’t used the policy.
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Reader Comments (7)
Posted by: Mike at 11/13/2009 03:40:31 PM
As an F&I manager for a luxury car dealership, most of the above is true. You can buy a cheap warranty, but you will get poor coverage. One thing to note is that several states, including Florida, are regulated for warranty prices, which means that we cannot negotiate the prices by law! If we offered it to Client A for $3000 and the same policy to Client B for $2500, we would be fined a substantial amount, and have to reimburse the $500 to everyone who paid $3000!
Posted by: TIM at 11/18/2009 09:46:36 PM
Some years ago, I bought several bumper to bumper extended warranties for 5 years/150,000 miles. We made one claim with so-so results and sometime later were in the process of a second claim when things began to go south. Fortunately we got reimbursed shortly before the company went belly up. We had over $3,000 invested that disintegrated with a single slap of a judge's gavel. That same gavel released the company from honoring a billion dollars' worth of policies. The company was headquartered in the Grand Cayman Islands and, I believe, beyond U.S. legal action. A dealer policy would be safer in my mind over the third party policies I bought.
Posted by: Tom at 11/19/2009 11:47:11 AM
These Extended warranties are the easiest to understand. They cover NOTHING. its that simple.
Posted by: Valreee at 11/25/2009 04:37:11 PM
I agree that most extended warranties are useless. Most people cannot possibly understand the legal mumbo jumbo used to separate you from your money. However, I must defend the one extended warranty we have. We own a large motor home. We have our extended warranty through Good Sam. Their representatives are intelligent and understand the intricacies of motor homes. We have only needed to use the service once, and we were delighted by their excellent customer service, and their immediate payment. These are relatively expensive warranties; however, one refrigerator, one transmission, or any other large issue with a motor home can be incredibly expensive. I realize this is a specialized market, but it is still reassuring to know that there are still a few honest business professionals around. By the way, we have no personal or work related interest in the company, just happy to have had good service...
Posted by: Joe at 11/25/2009 05:26:12 PM
On the Honda Care Warranty I think you can usually turn that in for the value of the remaining time. The rub is they count the first 3 yr / 36000 which is already covered by the bumper to bumper. Haven't had to use yet so we will see how that goes since I am just about to go over 36,000. I passed on my VW and am happy I did. I had one repair which cost just $150 thus far and I am almost to 75K.
Posted by: Jessica Anderson at 01/28/2010 11:08:30 AM
Hi, I'm the author of this article. Thanks to everyone for adding their thoughts. I got a comment via email that I wanted to share. Roger writes: "Good article in the December 2009 Kiplinger, but your last paragraph failed to mention that many states also have you pay a sales tax on the extended warranty, which is returnable to you if you cancel the warranty contract. When I cancelled the extended warranty on the Honda CR-V I bought in 2007, I had to file with the state of Pennsylvania to get my 6% sales tax returned. It took almost two months for my check to arrive, but was over $100.00 and I nearly forgot to file for its return." I thought this might be of interest to everyone. Good to know--thanks Roger!
Posted by: pickett randolph at 06/01/2010 02:14:20 PM
I have a 2+ year old Toyota Matrix with 6 months to go on my original warranty. I do not put more than 8,000 miles a year on the car. I don't want to buy a car for another two years and wondered whether an extended service agreement @ $1800 thourgh the dealer is a good idea. Thanks for your input!