The Pros & Cons of Purchasing an Extended Warranty on a New Vehicle

Extended warranties can be obtained from the manufacturer as part of the vehicle purchase or any time before the original warranty expires, either from the dealer or through the manufacturer's website. According to the Automotive Service Association, extended warranties are actually service contracts because they carry an added cost. As such, they are commonly and more accurately referred to as extended service contracts or extended service plans. Consumer Reports defines non-manufacturer extended service contracts as "prepaid repair contracts" that do not meet the federal law definition of warranty and that few states recognize as insurance agreements.

Research done in 2011 by industry watchdog J.D. Power and Associates confirmed that reliability ranks first in vehicle purchase concerns. Higher repair costs reflect the increased use of technology in automobiles, vans and trucks. An out-of-warranty breakdown can be a serious financial setback for any owner. Manufacturers and the Vehicle Protection Agency trade association agree that the parts and labor expenses for such a major failure likely would exceed the price paid for an extended service contract.

However, not all consumers benefit from extended service plans. The number of miles they drive may be so low -- fewer than 1,000 miles per month -- and the length of time between trade-ins so short that the contract cost cannot be justified. Edmunds.com, the recognized auto industry information expert, also advises comparing your experience with out-of-warranty repairs to the contract cost, especially when purchasing the same brand of vehicle. Should your historical outlay of cash for car repairs be lower than the price of an extended service contract, Consumer Reports suggests depositing the money you would have paid for the plan in an interest-bearing account as an emergency cushion.

Provider reputation plays an important role in your decision to purchase an extended service plan. Manufacturers recognize the customer relations potential these agreements carry and how they could influence repeat sales. Manufacturer plans have relatively sound financial backing from underwriters with high ratings, according to the credit-rating agency A.M. Best. An original equipment manufacturer extended service plan gives the buyer access to a national dealer network for added convenience. Any dealer can pull up contract information from the company's database, eliminating the need to provide hard copies. Non-OEM providers belonging to the Vehicle Service Agency must adhere to a code of conduct as a membership requirement.

Third-party providers might stipulate which dealer must be used and claimants must present their agreement. Often the contract owner has only one choice: the dealer who sold it. Warranty Week's 2010 study indicated that more than 75 percent of VSCs have A.M. Best underwriter ratings of A- or better. However, the St. Louis Better Business Bureau notes that some third-party providers are insured through risk retention groups that cannot resort to state guaranty support when unable to cover claims. In its 2011 study, the BBB cites CNA National Warranty Corp.'s recommendation to know the plan underwriter's rating and status before making a decision.

Extended service plans exist to cater to a range of owner interests. Some, called "wraps," cover non-powertrain components for owners with vehicles that come with 10-year 100,000-mile powertrain warranties. Others focus on the powertrain to complement more limited factory warranties. Benefits such as towing, roadside assistance, rental and trip interruption coverage may be included for additional cost. Tiered options from some providers allow buyers to tailor their contract by coverage, price and deductible. Deductibles may be per covered item or per incident. A waiting period may be imposed.

The Vehicle Protection Agency recommends understanding the contract terms to make sure the contract will cover the repairs you want covered. Wear-and-tear coverage, for instance, excludes limited-life and frequently replaced components such as brake pads, while breakdown coverage will help you only when an included part actually breaks rather than dies. In addition, pre-existing-condition clauses may make a particular plan ill-suited for your needs. To determine whether a claim qualifies, plan administrators may require diagnostic testing, the fees for which may come out of your pocket if not included in your agreement. According to the Automotive Service Association, a common requirement stipulates routine maintenance be performed at mileage points that differ from those recommended in the vehicle owner's manual. Oil changes under an extended service plan, for example, may have to be done more frequently.

One universal advantage of reputable extended service plans: You have no involvement in the paperwork. Dealers prepare and submit the necessary documents; the provider pays them directly. You should be able to cancel any time and qualify for a refund. Consumer Reports notes that cancellation may be easier if the cost was not included in your new-car loan. Your plan will most likely be transferable for a fee to a new owner when you sell your vehicle.