How Extended Warranties Work

What They Are

Extended car warranties are warranties that provide a car owner with an extended period of coverage beyond the standard or original warranty for repairs and maintenance on the vehicle. They are like a type of insurance in that the car owner may pay for a warranty but never utilize its benefits, depending on the needs of the vehicle. They can prove to be very beneficial, however, if unexpected repairs or maintenance costs exceed the amount of money that the warranty cost or what would have been spent out of pocket from savings without the warranty.

Purchase

When you buy a car, the dealer typically offers you the option to buy the extended warranty at that time. It generally is cheaper to buy the extended warranty when you buy the car, but it isn't required. You can pay for the warranty upfront, or you can have the cost of the warranty rolled into the cost of your car payments (if not purchasing the vehicle outright). If you don't buy the warranty at the time of auto purchase, you can still purchase it (generally for a bit more money) any time before the original or standard warranty expires.

Specifications

The extended warranty policy on your vehicle will specify what is covered by the warranty purchase. Some warranties cover only repairs, or specific repairs, or they cover both maintenance and repairs but only from the dealer's mechanics and providers. Some only cover parts but not labor. You should make sure you know what is covered under the warranty prior to purchase.

After Purchase

After you purchase your warranty, if you have a problem with your vehicle, you can use the warranty like an insurance policy. To cash in, all you have to do is present proof of the warranty to the dealership or to the repair or parts shop. Sometimes the warranty specifies that you will be reimbursed for all charges, which means you still may have to pay upfront until the dealership or warranty company can send you a refund payment. Most of the time, however, presentation of the warranty is as good as presentation of funds--the repair or parts shop gets paid by sending the bill to the dealership or warranty company.

No Guarantees

There is no guarantee that you will need to use an extended warranty on a vehicle if you purchase one. This is the gamble of the warranty purchase--you may be paying for service you never use. However, buying the warranty may be cheaper in the long run if you do have an accident, discover a manufacturing problem with a part or parts of the vehicle, etc. To see if it's worth buying the warranty, you should try to calculate in advance how much you would be spending on repairs when the original warranty expires by factoring in general wear and tear and average repair costs per year for a vehicle of your make and model.

Resources

• Car warranties--pros and cons