"I'm glad we could make a deal," the salesman says, shaking your hand.
But just as you've breathed a sigh of relief, you realize that you are walking into the Finance and Insurance (F&I) office to finalize the contract. Once inside that room, the F&I manager will likely offer you things like paint protection, prepaid maintenance plans, theft-recovery systems and a road-hazard warranty for your tires. But the biggest product he'll probably push will be the extended warranty for the car itself. Extended warranties, also known as "service contracts," can provide peace of mind to some car buyers. Car dealerships like them because they are an additional profit center for the business. As with any decision in a car purchase, it is important for you to research and weigh the benefits of the product
An extended warranty is repair coverage that kicks in after the typical manufacturer bumper-to-bumper warranty has expired. This extended warranty will cover most major breakdowns and will — in theory — stabilize the cost of repairs, since the price of parts and labor tends to fluctuate over time. It is important to note that you have the option to purchase this warranty any time before the manufacturer warranty expires. You can even purchase an extended warranty after the manufacturer warranty expires, although the price will go up considerably.
You might already have asked the five questions that should precede the conclusion of a new-car deal. But now it is time to ask yourself five extended-warranty questions. They'll help you decide whether to purchase an extended warranty, and they'll also help you get the best price.
Warm-Up Question: Do you plan on keeping the car for a long time?
This is a common question that the F&I manager will ask, and it's worth your consideration. Do you get tired of a car by its third year? If so, paying for an extended warranty doesn't make much sense, since the manufacturer warranty will still likely be in effect. But if you are someone who drives a car until the wheels fall off, the extended warranty might be worth considering. Nevertheless, go through the rest of the questions here before making a decision primarily based on length of ownership.
1. Who stands behind the warranty?
Many dealerships offer third-party warranties from companies with varying track records. If you are going to purchase an extended warranty, make sure it is backed by the automaker, not just the dealership or some other company. You can use a manufacturer-backed extended warranty at any dealership across the country. A third-party warranty might be good only at the dealership that sold it to you.
If you are considering coverage for a specific purpose, such as a road-hazard policy that isn't offered by the automaker, check for online reviews to see what others are saying about it.
2. Have you shopped for the best price?
It's unlikely that an F&I manager will let you shop around while you're sitting at his desk with a pile of purchase paperwork between the two of you. This research is best done prior to your dealer visit on the day that you finalize your purchase. If the car purchase is already a financial handful, you can also shop for a better price after the sale.
Get a price quote from the F&I manager for the warranty he's offering. Then shop it around by phone with F&I managers at other dealerships in the same way that you compared prices on the car you're getting ready to buy.
The F&I manager at the dealership that has your car might say that the price of the extended warranty is not negotiable, but that might not actually be the case. If you check with other dealers, you'll find that some of them will have a lower asking price for the same product. Or they might be more willing to negotiate.
Take a look at this article to learn the bargaining strategies that an ace negotiator employs when he shops for an extended warranty.
3. Do you know what's covered?
An extended warranty isn't the cure-all that some dealers make it out to be. Many wear-and-tear parts — items that will eventually break or wear out — are not covered by most vehicle extended warranties.
To complicate things even further, many extended warranties come in coverage tiers (silver, gold, platinum, for example), each with its own price and level of coverage. Take the time to read the fine print to determine what is and isn't covered.
You must also determine who will front the cost for the repair bill. Are the repairs fully covered? Do you have to pay a small deductible? Or do you have to pay for the repairs up front and get reimbursed later?
4. Will you have peace of mind if you don't buy it?
The answer here is all up to you. If you're someone who will always have a nagging feeling that you should have bought the warranty, go ahead and get it. Sometimes there's no price tag you can put on peace of mind.
On the other hand, if you are confident that you've purchased a reliable vehicle, you can walk away from the F&I office and not give the extended warranty a second thought.
But what if you don't know anything about the car's reliability? There are a couple of options available here.
Edmunds has reliability information in "reliability" tab in the used car model overview. New-car shoppers should scroll down to the bottom of the overview page and then click on the "reliability" link. For an example, scroll to the bottom of this page. You might not find the exact model year of the car you're purchasing, but the information on the site can give you a rough idea about that model's reliability. Edmunds does not have records on every vehicle, but the ratings listed are a good place to start. You can also find discussions of vehicle reliability in the Edmunds forums.
A second source is Consumer Reports, which offers reliability reports on a number of vehicles on its Web site and in its print publications. For a fee, you can browse through the reliability ratings it maintains.
5. Have you looked at your repair history?
Consider your own history with vehicle breakdowns. Have your other cars had the kinds of problems that would have been covered by a warranty? If you are considering a road-hazard tire warranty, for example, think about how many times you've had a flat tire. If there is a lot of debris on the roads in your area or if you've had several flat tires in a short span of time, a road-hazard warranty may be worth looking into. But if you can't remember the last time you had a flat, you may not need the coverage.
You also can add up how much you have spent on out-of-warranty repairs in the past and compare the total to the price of the warranty. For example, if you've paid $500 for repairs that occurred out of warranty, weigh that against the cost of the extended warranty.
You're never going to have the same repair history in any two vehicles, of course. But if you are buying a vehicle from the same carmaker, it can give you a rough idea of what to expect.
Bonus Question: Do you really need it?
Some F&I managers can make you feel that saying no to the extended warranty is like playing Russian roulette with your car. You never know when that costly repair "bullet" might strike. But new cars are more reliable than ever, and the data seems to indicate that most people might not need an extended warranty.
According to a recent J.D. Power study, overall vehicle dependability averages are good. The 2013 survey had the lowest problem rate since the study began in 1989.
Financial guru, Dave Ramsey, advises his readers to "Just say 'No'," to extended warranties and proposes an alternate solution: Set aside half of what you would pay for the warranty, and use that money to handle any car repairs that might come up.
Nevertheless, some people just aren't willing to take chances, or they prefer the convenience of an extended warranty. They're more comfortable knowing that any major repairs will be taken care of. There's nothing wrong with that. If you're a belt-and-suspenders person, just make sure you ask the right questions before you make this purchase.