What is an Extended Car Warranty?

Auto warranties are highly coveted by consumers shopping for both new and used cars. Being as no car owner wants to be left responsible for covering high maintenance costs when something unexpectedly goes wrong with their vehicle, manufacturers build warranties into their pricing as a means of compromising with the consumer.

Unfortunately, automobile warranties don't last forever. In fact, most manufacturer warranties only last three to four years (or 36,000 to 50,000 miles, whichever comes first), at which point the consumer is left to fend for his or herself, just as their auto begins to show signs of aging.

Luckily, most manufacturers offer extended warranties, which keep a car covered beyond the original factory warranty for a specified amount of time or mileage, whichever comes first. Extended warranties help to protect consumers from having to shell out thousands of dollars for expensive auto repairs and replacements in the future.

Most simply put, "An extended warranty is an insurance contract that ostensibly protects the owner from out-of-pocket repairs when a vehicle has a breakdown," says Isaac Bouchard, an automotive broker and author of the NiceDrivz.com blog.

An extended warranty, then, is essentially a service contract that a dealer sells to cover future repairs. These contracts are offered as an add-on cost at the time of vehicle purchase, though they can be bought later on in ownership as well. While at first an extended warranty may seem like a no-brainer purchase, there are several things consumers should consider before jumping into a service contract.

First, consumers need to consider how long they plan on owning their vehicle and how their factory warranty factors into this. For example, if a factory warranty covers the vehicle for three years or 36,000 miles and the owner plans on owning the car for less than three years, purchasing an extended warranty will be relatively pointless for them unless the policy is transferrable, which the majority of extended warranties aren't.

The exact coverage of the extended warranty is more or less up to the consumer. Some policies only cover items if they break, and will not cover "wear and tear" maintenance. "Wear and tear" encompasses all items that require replacement or repair as a result of degradation over time. Since "wear and tear" maintenance is very common and can add up to be very costly, most consumers will want to make sure their policy covers it.

Some extended warranties are a bit of a scam when it comes to servicing. Two of the most common issues that come up are money pits.

"Either you can only go to certain dealers," cautions Bouchard "or the company backing the warranty goes out of business."

If you've decided an extended warranty is a good purchase and have located a solid policy for your car, remember that, just like car shopping, the price is negotiable. Extended warranties are big sources of revenues for dealers and the prices are often inflated, so aim to knock 30-50% off the warranty price. A good bargain can be found if you shop around too.