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Extended Warranties - Are They Worth It?

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On: Mon, Oct 3, 2011 at 12:00PM | By: Peter C Sessler

Extended Warranties - Are They Worth It?

If you know anything about the car business, you'll know that car dealers these days don't make their money from the sales of new cars—dealer profits are made from used car sales, financing, the sale of aftermarket items, and extended warranties. In fact, extended warranties are extremely important to the financial well-being of a dealership—but are they necessary from a consumer's point of view? The answer is, it depends.

There is no question that new cars, whether they are domestic or imported, are built better than ever and come with excellent factory warranties. The typical warranty now is good for 36 months or 36,000 miles, whichever comes first, with some manufacturers offering even longer terms. In addition, most cars now are covered against rust perforation for 100,000 miles or more. With the sheet metal of most cars being made from galvanized steel, it is unlikely that today's car will rust out like older cars used to.

Back to the main question—do you need an extended warranty? If you lease a car an extended warranty is probably a waste of money, because most leases are 36 months or less. If you plan to keep your car, then it's a different story, especially if you plan to put a lot of miles on it. In such a case, then it is definitely worth it. Cars are extremely complicated machines and they do not get better with age. The likelihood that something is going to break increases exponentially as you rack up the miles. And, I'm sure, everyone has some idea what it costs to fix cars these days, even such cars as Toyotas and Hondas, which have reputations for reliability. The point here is not whether you need one or not (that decision is up to you) but, rather, how to save money and getting the right extended warranty.

If you read some of the consumer report-type magazines, you’ll find that they are generally against purchasing extended warranties. They believe that they aren’t worth the money and that today’s cars don’t need them. Of course, I beg to differ and as I’ve said before, cars don’t get better with age!

Like everything else in a dealership, there is no "official" set price for extended warranties. The rule "charge whatever the market will bear" certainly applies. This means you'll have to bargain down the Business (Finance) Manager who usually offers the warranty to you. Like the cars, they have room to spare.

Another point to consider is what type of warranty. Usually, they'll offer you a range of warranties that have different time and mileage limitations as well as what they cover. However, even the "Bumper to Bumper" warranties don't cover everything so make sure you find out what they don't cover and read the fine print. They all do not cover maintenance items such as belts, hoses, and the like and definitely not anything having to do with paint problems. You can buy "maintenance plans" which pay for a set number of oil changes and the like, but you'll find that these are a little pricey.

Another point to consider, and it is a big one, is whose warranty is it? Is it a company you've never heard of or is it the car manufacturer's own plan?

I recommend you stay away from companies you've never heard of, even if they tell you they are backed by some big, well-known insurance company. Every insurance company I know wants to limit claims and, if you have a questionable breakdown, they might refuse to pay. Anyway, the insurance company is there as a last resort should the warranty company go out of business. Dealing with an unknown company when you are out of town with a breakdown can be problematic as well. Of course, there are warranty companies, such as General Electric, that have a good reputation.

A manufacturer's own warranty company might also feel the same about claims, but they may want to keep you as a future customer, too. And dealing with a manufacturer's warranty is a lot easier. All you have to do is to present the policy to the service manager (or tell him you've got one—it's all computerized) and there usually isn't any bureaucratic headaches with getting approval for a claim and so forth. They do cost more, though.

Finally, what about extended warranties for used cars? These are definitely worth considering; however, some of these can get real expensive, especially if you've purchased a four-wheel drive vehicle. Definitely get one if you've bought a late model used car that still has some of the original factory warranty in effect. These warranties are generally fairly reasonable in price, but, again, remember to get a manufacturer's warranty and do everything you can to bargain the price down.


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