Are Extended Warranties Worth It?

If you’ve ever bought a car at a dealership, you’ve likely been offered an extended warranty on your new—or new-to-you—vehicle. In the heat of the moment, you may have been caught off guard. Between all the other factors and expenses you’ve had to consider to get to this point—researching the right car for you, finding an auto loan, and saving a down payment—it might seem easiest to say yes to the extended warranty and get on with your life. After all, the dealership is telling you what a great idea it is.

However, it’s important to do your research before you spend money on something you might not need. The details of extended warranties can get a little confusing, to the point that sometimes it’s even unclear what exactly you’re buying. Here we’ll explain what an extended warranty is, what it typically covers, and whether it’s worth the investment.

What is an Extended Warranty?

Extended warranties may be known by other names. Some financial institutions, like Amplify Credit Union, refer to them as “major mechanical protection” plans, while car manufacturers or dealerships may market them as extended auto warranties, vehicle protection plans or vehicle service contracts. No matter what they’re called, these plans generally offer the same service: coverage for future car repairs.

The way extended warranties work is relatively straightforward. You buy a protection plan from a dealership or third party, and in exchange, the dealership—or company—that sold you the plan will pay for repairs covered under the plan after the manufacturer’s warranty expires for the duration of the plan’s coverage.

Where Can You Buy an Extended Warranty?

Extended warranties can be purchased through vehicle manufacturers, auto dealerships, and independent providers such as Mechanical Protection Plan, Carchex, Endurance, or CarShield. While dealers may provide their own extended warranties, they will also often work with independent providers.

What Does an Extended Warranty Cover?

Extended warranty plans have different levels of coverage that you can choose. These plans can be purchased for both new and used vehicles, as long as those vehicles meet the specified requirements of the plan.

Unlike factory warranties—which typically only cover manufacturer defects—some extended warranties on new cars cover the cost of fixing parts that fail due to wear, tear, and use. More expensive and higher levels of coverage will also tend to include select routine maintenance costs. In general, extended warranties will offer some combination of the following:

• Vehicle Service. This is the crux of most extended warranties, paying for the costs of repairs on covered mechanical failures after the manufacturer’s warranty expires.
• Emergency Roadside Assistance. This service might include fuel deliveries if you’re stuck on the side of the road, lockout assistance, battery jump-starts, and winching.
• Guaranteed Asset Protection (GAP). In the case your car is totaled, GAP coverage helps pay for all or part of your remaining car loan balance once a settlement with your auto insurance is reached.
• Maintenance Coverage. Some plans will pay for all your vehicle’s scheduled services, like tire rotation and oil changes.
• Other Extras. The most extensive (and expensive) extended warranties, might also include coverage for things like tire and wheel road hazard repair, windshield repair, key fob repair or replacement and paintless dent repair.

What Isn’t Covered by an Extended Warranty?

Few of these plans cover everything. There is typically a list of exclusions and scenarios that would prevent an included item from being covered. For instance, most extended warranties usually won’t cover damage or service for the following:

• Tires, wheels, and rims
• Paint, glass, or upholstery
• Wear-and-tear parts like brake pads and wiper blades
• Damage due to accidents, collisions, or misuse
• Damage due to weather events like floods or hail

What’s the Difference Between an Extended Warranty and Auto Insurance?

Purchasing an extended warranty is no replacement for auto insurance coverage. An extended warranty only covers breakdown repairs, not repairs needed due to an accident—either for your car or the other car involved.

In fact, in the state of Texas, car owners are required by law to show proof that they can pay for the accidents they cause—usually in the form of auto liability insurance. So, even if you do decide to purchase an extended warranty or service contract, you’ll still need to purchase auto liability coverage from an insurance company.

How Much Does an Extended Warranty Cost?

Extended warranties are paid for upfront, usually when you purchase the car. The cost can be rolled into your vehicle financing or financed separately with a down payment and a year-plus repayment term. Prices vary depending on several factors, including:

• The make and model of the vehicle
• How old the car is
• The number of miles it has
• The deductible amount and the level of coverage that you select

On average, however, you can expect to pay anywhere between $1,000 and $3,000 for a plan.

Is an Extended Warranty Worth It?

The value of an extended warranty is often tied to the performance of your vehicle. Some people who purchase the plan experience a significant system failure within the first few years of ownership. For them, the service contract was an important investment.

Conversely, many car owners may go the entire life of the service contract without ever having to use it. Newer cars are typically less susceptible to breakdowns and failures, making it less likely that you’ll get your money’s worth. While any car is at risk for a major mechanical failure, some car buyers prefer to set that money aside themselves in an emergency fund, rather than pay for a plan.

In general, most consumers find that an extended warranty isn’t worth the initial up-front investment. In fact, a recent Consumer Reports survey found that car owners typically paid much more for extended warranty coverage than they received in direct benefits, and nearly 55% never used the warranty at all.

Purchase the Plan That’s Right for You

While many may find that an extended warranty isn’t right for their situation, that doesn’t mean these plans should be avoided at all costs. You should still do what’s right for you. If purchasing an extended warranty gives you peace of mind and fits within your budget, it might be a worthwhile purchase for you—just make sure to look at every line of fine print before you sign on the bottom line.