Whenever someone asks me if they should buy a warranty, the short answer is yes. But there are always some caveats with that. First and foremost lets clarify two things. A warranty in the car business is the guarantee the dealer offers you for free. A Vehicle Service Contract (VSC) is what you are buying when the dealer offers you an “extended warranty”.
So, if I sell a car that comes with a 30 day or 1,000 mile guarantee, with repairs paid for by the dealer, that is a warranty. If you buy a 3 year/36,000 mile “warranty”, along with the vehicle, that is a vehicle service contract.
I recommend people buy VSCs for 2 main reasons. #1, the cost to fix cars has drastically increased over the last 5 years. Labor rates at most shops are well over $100 per hour and replacing engines or transmissions for $2,500 seem to be a thing of the past. More than ever, unfortunately, it is my opinion that cars are being built to break. Manufactures have increasing interest in making their money on parts and service. Since manufacturers make a lot of money on parts and service so its no longer in their interest to build to the standard they used to. They will give the new car away in hopes that you come back for life as a service customer.
#2, a car is the 2nd biggest purchase, aside from our home, that most of us make. When your car stops working, life comes to a hault, so why would you not insure it, not only from accidents but from major break downs? Most warranties cost $15-$40 a month. For that amount of money I think the peace of mind is well worth knowing a big shop bill won’t be coming your way!
So when do you not buy a VSC? Great question!
I do not recommend a warranty on a new car that you are going to get rid of before it is out of factory warranty. It makes no sense to pay extra for something that car already comes with. New cars come with a 3 year/36,000 mile bumper to bumper warranty which covers just about any failure you could have. If you are buying a new car and keeping it for 4 or more years they often have a VSC option to cover the car with bumper to bumper coverage up to 100,000 miles for somewhere between $1,200 and $2,200. I think that makes perfect sense, there is a very good chance you will get all that money back and then some.
The other time to If you can self-insure and don’t mind doing so, I would not buy a warranty. If your car needs a transmission and writing a check for $4,500 or $6,500 is no problem at all and you don’t mind doing that, then pass on the warranty.
What should I remember when buying a VSC?
Not all VSCs are created equal. Some VSC companies are shady, will use used parts on your vehicle and are awful for the shop to work with. Do a little research on the company and make sure they have trusted shops in your area and will replace broken parts with new parts before you sign up. Call your favorite shop and see if they will work with the warranty company.
Be sure to ask what labor rate is covered by the VSC company. I worked with a gentleman one time whose VSC only covered $85 per hour but his shop rates in a big city were nearing $200 per hour and he was responsible for the additional $115 per hour for the repairs!
Know what the VSC actually covers! Most warranties come with levels of coverage so make sure you know what exactly is covered and what is not covered by the warranty package you are purchasing. I have worked with a lot of customers who say they bought a warranty only to find out it was a very basic package that covers very little of the vehicle. It’s not fun to find out that you thought your warranty covers something it does not!
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