How Does an Extended Auto Warranty Work?

Definition

An extended auto warranty, also commonly referred to as an extended service agreement or vehicle service agreement, is a contract in which the auto manufacturer or independent warranty provider pays for breakdowns or mechanical failures of your vehicle for the length of the contract.

New vehicles are generally covered under a factory warranty that covers a certain period or a certain number of miles. For example, your factory warranty might cover problems with your vehicle for the first three years or the first 36,000 miles, whichever comes first. An extended warranty goes beyond the factory warranty.

You can purchase an extended warranty at the time you buy your vehicle, or you can also generally purchase one as your vehicle gets older. If you lease a vehicle, however, your lease may include an extended warranty, so be sure to ask your dealer for specifics.

One of the most important factors in deciding whether to purchase an extended auto warranty is what the warranty actually covers. For example, there are extended warranties that only cover your vehicle should it break down, which means you will be financially responsible for any other problems that are not the result of a break-down. Edmunds.com recommends carefully reading the fine print of any warranty you are considering purchasing to ensure that it will meet your needs.

Before you purchase an extended warranty, ask plenty of questions to ensure it is the right investment for you. Start by considering your vehicle's factory warranty: How long does it last? Do you anticipate owning the vehicle longer than the warranty's coverage period? If so, you'll want to consider an extended warranty. However, if you plan to trade in or buy a new vehicle before the factory warranty expires, you don't need to buy an extended warranty.

Extended auto warranties also include a deductible for which you are responsible, so know how much the deductible is and when that deductible goes into effect. There are typically two types of deductibles: per repair and per visit. The per-visit deductible is usually the smartest option, since your vehicle's problem may require the repair of more than one part. In that instance, you would have to pay the deductible for each repair that is made if you have a per-repair deductible.

In addition to choosing the best deductible for your needs, consider how you will be required to pay for your vehicle's repairs. Some warranties will cover the repairs upfront while others will require that you pay for the repairs then send in the receipt for reimbursement.

Find out what stipulations the warranty makes about where you take your car for repairs. Will you be able to take it anywhere you want, or will you be required to take it to the vehicle's manufacturer?

Finally, determine whether the extended auto warranty can be transferred to a new owner should you decide to sell your vehicle at some point.