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Do You Need an Extended Warranty?

An extended warranty is effectively an insurance policy designed to protect the owner from the cost of repairs after the original new-vehicle warranty has expired. An extended warranty is sometimes called a service contract, vehicle service agreement, or extended service agreement.

What are the types of extended warranties?
There are two general types of extended warranties. The first type (and the one most consumers are familiar with) are extended warranties offered by vehicle manufacturers. These comprehensive policies often extend the original warranty for an additional period of time, allowing customers to continue to take their vehicle to the dealer for service and repair once the original warranty ends.

The second type of extended warranty is offered by an independent service or insurance company. These warranties allow services to be performed at many different locations, including the dealership. Since the warranty is offered by a third party, some companies will require customers to pay the repair shop directly for service, and then submit receipts to the warranty company for reimbursement.

What are the benefits of an extended warranty?
An extended warranty is a safeguard against unexpected vehicle repairs. An extended warranty helps to ensure that repair costs are covered without undue financial stress. Many extended warranties are also transferable to future owners. This works in favor of the seller as it may increase resale value. For the buyer, it gives additional peace of mind when purchasing. The transfer fee is usually minimal. In addition to repair and resale benefits, many extended warranties offer other automotive-related benefits such as towing, car rental discounts, lost-key lockout services, and trip-interruption benefits that can help defray unexpected expenses if your vehicle breaks down far from home.

What they do not cover: exclusions and wear items
Extended warranties cover most major vehicle components, but they are not nearly as comprehensive as the bumper-to-bumper warranties that come with a new vehicle. Even the most comprehensive extended warranties have exclusions for items such as the windshield, headlights, or light bulbs. Wear items are vehicle parts that
deteriorate over time from normal use. These include tires, brakes, and shocks, which are nearly always excluded. The subtle differences between extended warranties offered by different providers are often found in the exclusions.

Does my vehicle need an extended warranty?
An extended warranty is ideal for someone on a fixed budget who does not want to be surprised with expensive repair bills. If that describes your situation, and you plan to keep your vehicle longer than the length of the original manufacturer's warranty, an extended service contract may be right for you. Like all insurance policies, it is prudent to do some homework before purchasing one to establish the reliability and repair costs of the vehicle in question.

A vehicle with a good reliability record may not be a strong candidate for an extended warranty. You can research vehicle reliability and quality ratings in the autos section of JDPower.com. Although the reliability of your particular vehicle is never guaranteed, vehicle trends become apparent in these long-term quality ratings.

Furthermore, a vehicle with low repair costs may not be a strong candidate for an extended warranty. Repair costs vary greatly between makes and models and it may be less expensive to pay for minor repairs out-of-pocket, rather than purchasing an expensive warranty. A common electrical component (such as an alternator) can cost double or triple the price on some vehicles. Check prices on common components to determine how much repairs will cost on your vehicle before you invest in a warranty.

A vehicle currently under the manufacturer's warranty may not be a good candidate for an extended warranty. Review your current warranty. If your vehicle is warranted by the manufacturer for another few years, there is no reason to have double coverage. Remember, you can always buy an extended warranty just before your original warranty expires.

The bottom line
Like any insurance product, some policies are less expensive and more inclusive than others. If you are a good candidate for an extended warranty, choose one that fits your budget with a sensible deductible, and a clause that allows it to be transferred to a future owner. Do your research correctly and you may find a policy that not only covers the cost of most of your repairs, but also pays for itself with increased resale value years down the road.
Mike Harley
Certified Pre-Owned vs. Used
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