You finally know what vehicle you want to buy. You're relieved that the researching and pricing process is finally over. But wait, there's more!
Since the job isn’t over until the paperwork is done, you’ll still need to decide whether to pay for an extended warranty, also known as a service contract.
Dealers generally offer car buyers the option of paying to essentially extend warranty coverage beyond the manufacturer's coverage. The bumper-to-bumper warranty that comes with the car covers the expense of repairing most malfunctions for a certain number of years or miles, whichever comes first. A common new-car warranty period is three years or 36,000 miles. An extended warranty kicks in when the manufacturer's warranty ends.
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Do some research before you sit in the hot seat in front of a dealer’s finance person. In interviewing vehicle manufacturers, dealers and independent providers, our researchers found that the price of extended service plan often ranges from $1,500 to $2,000. Be aware that you don’t have to buy it at the time of purchase, though you may pay more if you buy it later.
Our research shows that extended warranties often come with exclusions that may be described in a contract’s fine print. If you're considering a service contract, take the time to actually read it and be sure what is covered and what is not. Be aware that most manufacturers offer different levels of service, charging more for the level that provides the most coverage.
Our team found a consensus among experts that extended warranties backed by the manufacturer, as opposed to those offered by a separate, or third-party, enterprise, tend to be the best overall option. But no matter who’s offering the warranty product, make sure you understand what is covered and all other important details.
We found it pays to be wary of offers marketed through the mail, by phone or in a TV commercial. The U.S. Federal Trade Commission has stated that service contracts sometimes end up being handled by third-party companies that may not have a long track record of providing quality service. A third-party company is one that has no direct business relationship with the product it covers.
Just last year, two brothers who operated a Missouri-based third-party vehicle service warranty firm were sentenced to prison time for selling illegitimate service packages to as many as 625,000 people in 29 states, bilking customers out of millions of dollars. When it came time for repairs, the company, which charged up to $5,000 for the warranties, would often refuse to honor the warranty and pay for the repair.
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As to whether an extended warranty is a good idea or not, the answer is that it depends on what’s covered at what price, as well as your tolerance for risk. As one consumer spokesman for the Indiana attorney general’s office told our team: “Seldom will you find the extended warranty that pays for itself, but some risk-averse people feel better having it in their back pocket.”
If you’re considering a service contract on a car that isn’t new, take into account the details and cost of the service contract, and the condition of your vehicle. How old is the car, how many miles has it been driven and how long do you plan to keep it?
Experts say it's important to keep in mind that the need for major repairs tends to be rare. And, even if your car needs an expensive fix, the same money you saved by not buying an extended warranty can apply to the cost of the repair.
Be aware, also, that vehicle service contracts are usually a prepaid service, so you don't have the option of ending the contract or getting your money back.
Angie Hicks is the founder of Angie's List, the nation's most trusted resource for local consumer reviews on everything from home improvement to automotive repair. Follow Angie on Twitter @Angie_Hicks.