Why you shouldn’t get an extended warranty on a new car

This is part of our Car Buyer’s Glossary series which details all the terms you need to know whether you’re buying a new or used car from a dealership.

Here’s the short answer: an extended warranty is coverage you buy that comes into effect after the original factory warranty period has expired. Generally, you can buy it anytime before the factory warranty expires. Extended warranties can be offered by the manufacturer or a third-party company – and both types can be sold to you at a dealership. It is also called service contract.

Let’s clarify a few things before going any further. You will find more information below on each of these points.

  1. You do NOT need to purchase an extended warranty when you buy the car.
  2. You MUST NOT need an extended warranty to qualify for financing.
  3. You PROBABLY SHOULD NOT purchase an extended warranty. Yes, you read correctly.

It is very important to understand what type of warranty you are buying and who is actually responsible for administering the warranty. Just because the warranty is offered to you at a Ford or Toyota dealership when you buy the car doesn’t mean it’s a warranty backed by Ford or Toyota. Find out who the carrier is and do some research to see how happy people are with the claims process.

You will also want to make sure that the warranty will be honored at the dealership or mechanic you plan to service the vehicle at, and whether it will also cover a large network of other dealerships near where you plan to use the vehicle. What good is an extended warranty if your car breaks down and the tow truck doesn’t have participating mechanics to tow it?

As for what an extended warranty covers – even if it claims to be “bumper-to-bumper” – there’s very little consistency. You’ll want to read the terms carefully. Fortunately, most warranties are written to tell you everything is not covered – if it is not on this exclusion list, it is covered. The main thing here is: read everything very carefully.

And then there’s the fuzzy math involved in determining whether an extended warranty will actually save you money. We say “fuzzy” because we don’t know what might break outside of the warranty period. It’s somewhere between buying insurance and gambling. For most casual buyers, running the numbers here to determine the value proposition will be nigh on impossible.

This is partly because modern cars are quite reliable. Many don’t have serious repair needs that aren’t related to recalls during the life of the vehicle. And extended warranties won’t solve the cost of what we in the industry call “consumables” – items like tires, brake pads and rotors, and some expensive exhaust components that simply wear out with the weather. These are the expenses most car owners will need to budget for, not a rare catastrophic engine or transmission failure.

Another quick point: we’ve heard of car buyers being harassed by dealers to buy extended warranties as a condition of getting financing. For lack of a better word, it’s a scam. Find out who the lender is providing the financing and ask them before you sign any documents. They will almost certainly tell you that it is wrong. If they require an extended warranty as a condition of giving you a loan…you should go to another lender.

Some reputable consumer organizations, such as consumer reports, urge consumers not to bother with extended warranties at all. It is because, as CR says, “Extended warranties can have many pitfalls, relying on the fine print of the contract to deny coverage for almost any reason.” They recommend that you budget for unscheduled repairs after the warranty period ends – your bank account cannot deny repair coverage. There are no fine print.

We tend to agree with consumer reports here. There are a lot of unknowns involved with extended warranties, but one guarantee: you’ll pay a lot of money for a benefit that’s either hard to understand or hard to receive. And probably not needed.

If you care about a car that has a terrible reputation for breaking down right after the warranty period, and you’re comfortable understanding the legal language of warranty, an extended warranty might be right for you. You’ll want one that comes as close to the terms of your original warranty as possible, preferably offered by the car manufacturer and not a third party – a true extended warranty.

So what about this service contract? This is the technical name for an extended warranty. Warranties are included in the purchase price at the time of sale – any additional coverage purchased to cover a period of time after this initial warranty expires is known as a service contract. It’s just another, more accurate way of referring to the same thing.

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