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Buying a new or used car involves lots of decisions. What color do you want? How will you finance your purchase? Should you buy an extended warranty? An extended warranty can give you peace of mind after buying a new or used car, but these agreements have their limits and aren't always worth the cost. Learn how extended warranties work, when you may want one and other ways to cover the cost of car repairs.
What Is an Extended Warranty for a Car?
New vehicles are covered by the manufacturer's warranty (or factory warranty) for a certain number of years or miles. Factory warranties are free and usually include both bumper-to-bumper and powertrain warranties.
Powertrain warranties cover the parts that put the vehicle in motion, including the engine, transmission, driveshaft, axles and differential. The average powertrain warranty lasts five years or 60,000 miles, whichever comes first.
Bumper-to-bumper warranties, despite their name, don't cover every part of the car. However, they do cover many parts powertrain warranties don't, such as electronics, air conditioning, suspension and the sound system. Bumper-to-bumper warranties typically last three years or 36,000 miles, whichever comes first.
An extended warranty provides coverage after your factory warranty runs out. Know that extended warranties are not considered warranties under federal regulations and lack the legal protections of true warranties. They're technically vehicle service contracts—agreements to repair a vehicle during a certain period.
You can buy extended warranties from auto dealers, vehicle manufacturers and independent companies. Dealers often suggest purchasing an extended warranty when you buy a car, but you can buy one at any time.
Extended warranty coverage can vary widely, so be sure to carefully review the details of the specific warranty before purchasing. There are two basic kinds of extended warranties:
- Exclusionary extended warranties cover everything except the parts listed as specifically excluded.
- Inclusionary warranties cover only the parts named in the contract.
Some extended warranties cover only the powertrain; others offer bumper-to-bumper coverage. They sometimes cover vehicle maintenance, such as oil changes.
The cost of extended warranties varies depending on coverage, warranty length, the vehicle's predicted reliability and other factors. Warranty companies aren't regulated the way insurance companies are, so there are no restrictions on what they can charge. A recent survey reports the median price of an extended warranty was $2,458, but prices ranged from $1,615 to $3,208.
How does that compare to car repair costs? The average outlay for a repair after a "check engine" light appears ranges from $349 to $418, a 2021 CarMD report found. But some repairs cost much more. For instance, you'd pay an average of $6,064 to $6,524 to replace the transmission of a 2015 Ford F-150 pickup in Southern California, Kelley Blue Book estimates.
Pros and Cons of Choosing an Extended Warranty
What are the pros and cons of opting for an extended warranty on a new or used car?
Pros
- Customizable to your vehicle's needs: With so many places to purchase an extended warranty, you can likely find one that covers what you care about.
- Can be added into your loan payment: When you buy your extended warranty at the dealership, you can typically roll the cost into your auto loan and pay for it over time.
- Provide peace of mind: Do you worry about money? Assuming you can afford the extra cost, an extended warranty could help you sleep better at night.
Cons
- Not everything is covered: Extended warranties won't cover everything you may need repaired or replaced. For instance, they usually don't cover wear and tear, such as replacing brake pads. Some extended warranties include a depreciation clause, which reduces the amount paid for repairs based on your vehicle's mileage.
- May restrict repair options: Some extended warranties limit where your vehicle can be serviced. You might have to use an approved repair center or tow service or get pre-authorization from your extended warranty provider before having repairs done. This can be stressful if you need your car fixed quickly.
- Can be expensive: Extended warranties can cost several thousand dollars—a high price to pay, especially if the coverage is limited or you never use the plan.
- Potential for added interest: Rolling the cost of an extended warranty into your auto loan payment saves you a cash outlay upfront, but you'll pay interest on the amount, costing you more in the long run.
- Seller could go out of business: Should the company or dealership that sold you the warranty shutter, your warranty will become useless.
- May require waiting for reimbursement: Some extended warranties pay your auto repair provider directly; others require you to pay upfront and get reimbursed. If the latter, find out how long reimbursement takes and consider whether you could cover the cost until then.
- Coverage could be denied: Check a warranty's fine print for situations that could cause denial of coverage, such as failing to keep records of recommended maintenance.
- May have a deductible: Ask if the warranty involves a deductible (the amount you'll pay toward repairs before the warranty covers them). A large deductible could significantly reduce the warranty's payout and its overall value.
When Might an Extended Warranty Be a Good Idea?
Buying an extended warranty might make sense if:
- You can't afford a major car repair. Adding a bit more to your monthly car payment may be worth it to you if the cost of a car repair would be financially devastating. Look for a comprehensive warranty from a reputable seller and make sure you understand any actions that could cause denial of coverage.
- You drive your cars into the ground. If you'll get a new vehicle before the current car's factory warranty expires, an extended warranty will just duplicate coverage. Those who keep their cars for years are more likely to benefit from extended warranties.
- You're a high-mileage driver. Road warriors who will quickly exceed the 60,000- or 100,000-mile factory warranty coverage on their vehicles may want extended warranty coverage.
It's generally best not to buy an extended warranty at the time you buy a car, since you won't use it for several years. Wait until the manufacturer's warranty is nearing expiration or the deadline to purchase coverage is approaching.
Alternatives to an Extended Warranty
Extended warranties aren't the only way to cover costly car repairs. You can:
Bulk up Your Emergency Fund
Every household needs an emergency fund in case of a big, unexpected expense, such as car repairs. Automate a transfer from your checking account to your emergency savings account every time you get paid to quickly build a cash cushion.
Start a Car Repair or New Car Sinking Fund
A sinking fund is savings put aside for a specific purpose—in this case, car repairs or a down payment on a new car. You could start by dividing the cost of an extended warranty by 12 and putting that amount aside every month, or looking for ways to save money.
Purchase Car Repair Insurance
Similar to an extended warranty, car repair insurance covers mechanical breakdowns and repairs that car insurance doesn't pay for. Car repair insurance is usually limited to newer cars, so it's not an option for everyone. However, it generally costs less than an extended warranty.
Look for a Long Factory Warranty
Purchasing a new car with a long factory warranty can help safeguard against expensive repairs. Hyundai, Kia and Mitsubishi vehicles all boast bumper-to-bumper warranties of five years or 60,000 miles and powertrain warranties of 10 years or 100,000 miles, whichever comes first.
Buy a Reliable Vehicle
Rather than purchase an extended warranty, your money might be better spent paying a bit more for a car whose predicted reliability is better than average. (Consumer Reports and J.D. Power are good sources of reliability data.) Then follow manufacturer recommendations for regular maintenance to keep your car in good shape.
The Bottom Line
Whether you plan to purchase an extended warranty or not, a good credit score could help you save money on your auto loan. To give you the lowest interest rates, lenders typically want to see a FICO® Score☉ of 700 or higher. Check your credit report and credit score before visiting the auto dealership to see if you measure up. If your credit score needs a boost, reducing debt, paying bills on time and minimizing your use of credit can help improve it.