Extended warranty for car repairs. What exactly is an
auto extended warranty, and what does it cover?
Should you extend your car warranty? Does it make economic sense?
Here's the article....
Auto Repair Insurance: Extend Car Warranty, Myths and Facts
How much
insurance does one need? You have the big four: home, health, life, and
car insurance. Then there’s a second category, which starts
getting a little hazy with credit card insurance, purchase protection
plans, fraud insurance and more.
Extended auto warranties, also called
extended service contracts, extended service policies, or
an extended automobile warranty, fall into the mist of this second
category.
When we extend a car
warranty, it is supposed to pay (in full or in part) for specific
car repairs for a specific period of time after the expiration of the
factory warranty. They can be a great value. They can also be a
significant waste of money. It gets quite foggy in the details. What
exactly is covered? How long? How much? Are there hidden charges?
There are
numerous extended warranty companies, and an even wider variety of
warranty packages available: silver, gold, platinum, platinum-plus, and
a host of other confidence-building words. What’s the best
plan, and are extended service contracts worth the money?
Extended auto
warranties, like life insurance policies, are a numbers game.
They’re a gamble. You pay $2500-$4500 for a 2 year,
100,000-mile protection plan and hope that you get at least that back
in warranty repairs. The provider on the other hand, hopes to pay out
less than it insured.
There are three
major types of plan providers: The manufacturer, the dealership/third
party, and third party providers. Each one has its pros and
cons (discussed ahead).
What exactly is
covered in an extended service plan? As mentioned above,
what’s covered depends on the package purchased. Some plans
only cover the power train: the mechanical components of the engine,
transmission, and rear-end.
Other plans cover the power train plus some
electrical components. Still others cover electrical, advanced
electrical, and computer components.
Some plans only cover what’s
listed in the contract. This is called a “Stated”
or “Named” contract. This means that if
it’s not stated, it’s not covered. Some cover
bumper-to-bumper, similar to a manufacturer warranty, except trim
pieces, upholstery, exterior components, cosmetic items, and a number
of other exclusions.
Never before
has the adage, “The devil’s in the
details,” been so applicable.
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Manufacturer
Extended Plans: Extended service plans from the manufacturer
are the best in terms of coverage, convenience, and quality. Coverage
is similar to the warranty while the vehicle was under its original
factory warranty—with similar exclusions stated above. The
billing is direct, meaning you don’t have to pay
out-of-pocket, except for a deductible, if applicable. Quality is great
too, as an extended warranty from the manufacturer will only use
factory parts. Manufacturers also have money, so there’s less risk of
bankruptcy - a common event with extended warranty companies..
The down side
of manufacturer extended service plans is that they are not cheap.
These plans are generally the most expensive, require low mileage
standards, and necessitate servicing your vehicle at a dealer for
coverage.
Dealership/Third
Party Plans: Extended warranties from a dealership are
actually from a third party insurer. These providers are generally reputable, but not always. However, if there is an issue (such as the
warranty provider filing chapter 11, which again, is quite frequent in the
extended service contract business), the dealer may step in to cover any repairs that would have been covered under the
defunct plan. Also, claims are easier: billing is direct because the
dealership has a working relationship with the provider, and there is
usually a general agreement on the price of repairs.
Some dealers
set up their own “internal extended warranty,”
which is honored by the selling dealer. This is rare, and should not be
confused with a manufacturer warranty.
Important: extended warranties are often passed off as
“manufacturer” warranties. They’re not.
This is a sales trick. Also be aware that there is a significant mark
up on these plans (A $1000 is not uncommon), which, if you decide to purchase a plan, can be negotiated down to cost - or close to it.
Third
Party Plans: These plans are called third party plans because
they are outside the responsibility of the manufacturer and the service
center performing the repairs (unless there’s a working
relationship with a repair shop as stated above).
There are
hundreds of extended service contract companies. Some have good
reputations, some don’t. Third party plans are frequently
sold by used car dealers.
Important: You may also receive an official looking
notification in the mail stating that your warranty is expiring, and
directing you to call an 800 number ASAP. This is a marketing tactic by
an independent warranty provider. Despite the
“official” appearance of the postcard or envelope,
it’s not from the manufacturer. Manufacturers do not send out
reminders about warranty expiration.
Given
the wide-variety of third party plans there are numerous red flags.
1)
Claims: Extended warranty companies will be quick to tell you
that filing claims is easy, and that the service center gets paid
immediately via a credit card. Thus, there’s no out-of-pocket
expense for you.
However, the warranty company can’t dictate
a service center’s policies. Some service centers will only
accept payment from the repair customer. Thus the burden is on the
repair customer to fill out the forms, contact their warranty company,
and await reimbursement via check, which can take 2-8 weeks.
It is the
service center’s responsibility to contact the extended
warranty company to let them know what’s wrong with the
vehicle and to check coverage. This process can take anywhere from 20
minutes to 20 days, sometimes more, depending on the degree of repairs
and especially the amount. (See $1000 and Adjusters ahead)
Service centers
and extended warranty companies frequently battle over the
“fair” price of repairs. Many repair shops no
longer negotiate, and just state the price, leaving the contract holder
(i.e., the service customer) responsible for the difference, if any.
2)
Rentals: Rental coverage is a great benefit. However, there
are fixed rates and time limits. In other words, the warranty company
is not going to pay to have you drive a Mercedes-Benz,
even if you drive a Benz. Rental allowances range from $25 to $35 per
day. Rental coverage is usually based on the number of hours it takes to
repair the vehicle, NOT the number of days your car
has been at the shop.
3)
$1000 and Adjusters: Repairs that approach $1000, or that
require a significant amount of work, will be cause for the warranty
company to call in an adjuster to confirm the diagnosis. This will
delay the repairs by a minimum of 24-48 hours. It may cost you
additional money when an adjuster is involved. A repair center may charge you additional time (.5 to 1.0 hour) to
have your vehicle pulled back into the shop for inspection, as well as
for the time spent with the adjuster.
4)
Tear-down Charges: In many cases, an extended warranty
company will require that a particular component be taken apart for
inspection to determine if the repair is indeed needed and covered.
This puts the service customer in a very awkward position. The customer
will have to authorize potentially hundreds of dollars of tear-down
expense in the hopes that the repair is covered. If it’s not,
the customer is out the hundreds in tear-down PLUS the actual repair. This does happen!
Common
Myths About Extended Automobile Warranty:
Extended
warranties cover maintenance services and brake work.
No. Extended warranty plans do not cover maintenance or wearable items.
Brake pads and rotors are wearable parts. Maintenance such as coolant,
brake and transmission flushes, tune-ups, services, oil changes, bulbs,
wipers, and more are not covered.
They
told me it’s bumper-to-bumper, so it covers everything, right?
Wrong. Not even a factory warranty covers everything. When pitching the
sale for the extended warranty, one is very often lead to believe that
he or she will have nothing to worry about. This is just not true on so
many levels. For example, if your bumper falls off it’s not
covered.
I
don’t have to pay anything, right?
Wrong. Despite the claims of 100% coverage or bumper-to-bumper coverage, there are many factors
involved. The labor rates, labor hours, diagnostic times, parts prices,
and machine work are just a few items that often conflict with a
service center’s policies and a plan's coverage.
Some extended contracts only pay a
maximum of $55 per hour, and only allow one half hour for diagnostic
time. This is generally unacceptable to the service center, as labor
rates have skyrocketed to over $110 per hour at many dealerships, and
average $80 at local shops. Moreover, with the complexity of
today’s vehicles, diagnostic time is at a premium.
In the end, it is the
customer that pays the difference.
If I
have an expensive problem, I can just purchase an extended service
contract.
It’s unethical, but it’s an option many attempt.
However, most service contracts have a minimum time requirement before
the first claim can be filed: usually three months. Also, many
contracts require that your vehicle be inspected by a service center to
check for pre-existing
conditions—just like life insurance.
My
contract lasts up to 100,000 miles.
Only if the time limit doesn’t
run out first. All extended warranty plans have a time limit. For
example, a typical contract will state that the vehicle is covered for
two years or 100,000 miles, which ever comes first. During the sales pitch, however, the emphasis will be on the 100,000
miles, not the time.
If my
car breaks, it gets fixed like new.
Actually, depending on the contract, an extended warranty company can
insist on installing remanufactured or
even used parts.
Items
commonly not covered by extended warranties:
- Any component with a pre-existing condition
- Any
component related to a Technical Service Bulletin (TSB)
- Many
components that has been updated by the manufacturer
- Extra
components necessary “due to manufacturer
updates”
- Trim,
molding, cup holders, dashboard, console, body parts, glass
- Many
accessories: radios, DVD players, TVs
- Expensive electronics: climate control units,
navigation assemblies
Extended
automobile warranty positives: Some service contracts are
transferable, and may thus increase the resale value of a vehicle. Many
come with trip interruption reimbursement, towing and 24-hour road
side. Some plans can also be financed, or have E-Z Pay Plans. Others
offer a money-back guarantee.
What
should you do? You’ll get lots of advice about
doing the research, comparing plans, and reading the fine print. This
is all sound advice. But what about doing the math?
Let’s
say a plan costs $2500 for 2 years or 100,000 miles, whichever comes
first. To break even you’ll need a minimum of $1250 per year
in covered repairs, excluding regular maintenance. Remember covered is the vital word here.
Another way to
break it down is to anticipate having to pay $104.17 per month over the
next two years in “covered” repairs. Do you want to
take that bet?
What
could happen? You could double your money or more in repair
work. You could conceivably get a new engine and transmission (or used
ones anyway). You could also easily spend $2500 for a service contract,
and still have to pay another $2500 for repairs, which for a variety of
reasons, were not covered under your plan. Now you’re out
$5000.
Alternatively,
you could keep the initial $2500. All an extended warranty
does is prepay for repairs. You could stick the money in the bank and
collect interest. Then you could withdraw the money for repairs as
needed.
Another
consideration that’s rarely discussed is the cause of the
problems. Many car repairs problems are the result of wear and tear,
neglected maintenance, physical damage, or acts of God—such
as flood damage. None of this is covered. The gamble only covers failed
components.
If the vehicle
you’re driving does cost $2500 to $4500 in repairs due to
outright failed components, is it a vehicle you even want to consider
keeping? A vehicle that needs this kind of repair work due to
mechanical, electrical, or computer failures may not be worth it. The
$2500-$4500 would be better spent on an upgrade to a quality vehicle
rather than insuring a lemon.
There’s
no question that auto repair is expensive, and even quality cars break
from time to time. But do they breakdown to the tune of $2500-$4500?
That’s a hefty bet on a “possibility.”
Terence
O’Hara from the Washington Post (www.washpost.com)
makes an excellent assessment about extended warranties in general. He
writes:
…extended
warranties play upon a basic human trait to avoid loss, even if it
means sacrificing a possible future gain…the gain is all the
other things of value that a consumer could buy with the money that was
spent on a warranty
What’s
the best plan? Money in your bank account!
To learn more about eliminating repair scams Click Here
-Theodore P.
Olson ©
http://www.repairtrust.com/
Making Sense of Car Repair Prices
MLA Style Citation:
Olson, Theodore. "Auto Repair Insurance: Extended Warranties, Myths and Facts" RepairTrust. 23 February 2007. http://www.repairtrust.com/articles_extwarr.html
APA Style Citation:
Olson, Theodore. (2007, February 23). Auto Repair Insurance: Extended Warranties, Myths and Facts. RepairTrust. http://www.repairtrust.com/articles_extwarr.html
Chicago Style Citation:
Olson, Theodore. 2007 Auto Repair Insurance: Extended Warranties, Myths and Facts. RepairTrust (February, 23), http://www.repairtrust.com/articles_extwarr.html |
