John Pallay of Mansfield, Ohio, found out the hard way that automobile extended warranties can be a raw deal. Pallay recently wrote to Kiplinger's to relate his tale of warranty woe: When he bought a used 2002 Pontiac Sunfire nearly three years ago, he also bought a $2,000 extended warranty from National Auto Care (now called NAC). Since then, Pallay writes, he has shelled out $1,400 for repairs -- and his policy has paid just $30. Some parts that needed replacement were excluded from coverage. Other repairs weren't covered because the breakdown was caused by a noncovered part.
Hit and miss. Extended warranties consistently inhabit top-ten lists of consumer complaints for a good reason: They often make it difficult to cash in. The language may, for example, obfuscate what is covered and what isn't so that you end up footing the bill instead of the company backing the contract. The fine print may include a per-item deductible instead of a per-visit one, meaning you could rack up several deductibles in one trip to the shop. Diagnostic fees may not be covered if the part that's found to be causing the problem isn't covered. The reimbursed labor rate may be less than what your shop charges. And the warranty may be subject to termination if you don't follow its maintenance schedule.
Some high-profile warranty companies have gone bankrupt, leaving customers in the lurch. And some 40 state attorneys general have investigated a massive phone and direct-marketing campaign that was waged last year. The companies involved sent out mailings that appeared to be from a car dealer or manufacturer to sell often-worthless warranties.
If those caveats don't scare you off, the high cost of extended warranties may. According to F&IMagazine, a publication for auto dealers, a typical extended warranty costs an average of $1,790, and $795 of that is profit for the dealer. And in a 2007 survey by Consumer Reports of new-car buyers who bought extended warranties, 42% never used their contracts because their vehicles didn't need repairs that weren't covered by the factory warranty.
Should you ever buy one? If you plan to keep your car for no more than a year or so after the factory warranty ends, an extended warranty is a losing proposition. But if you plan to keep your vehicle till the wheels fall off, or you're buying a used luxury car outside of a certified pre-owned program, an extended warranty might make sense. You will pay less if you purchase it when the car is new. For example, a top-of-the-line contract for a new Mercedes E350 from EasyCare -- an administrator for several manufacturer plans that also sells warranties to individuals -- would cost $2,527 and cover repairs until the odometer read 100,000 miles. The same coverage for a used 2005 E-class Mercedes with less than 60,000 miles would cost $3,082 and cover another 50,000 miles.
If you take the plunge, shop hard. Philip Reed, of Edmunds.com, recommends manufacturer plans over third-party ones. They may cost more, but they tend to have fewer loopholes. With a third-party contract, check out the administrator's complaint record with the Better Business Bureau. For example, NAC is rated B and is not accredited by the BBB, but EasyCare gets an A+ and is accredited. That means the company has committed to make a good-faith effort to resolve complaints.
Read the contract -- all of it. Also be sure to steer clear of warranties that require you to pay for repairs upfront; it's better if the dealership is paid directly. Finally, haggle for a lower price. The Consumer Reports survey found that 75% of people who negotiated won a discount.
If you do sign but develop buyer's remorse, don't throw up your hands. In most states, you have the right to cancel within 30 days of signing a contract if you haven't used the policy.