Extended Warranties and Service Contracts: Are They Worth It?
Many people are put off from buying a used car because they are afraid that they will be unreliable and that they will be buying someone else’s problem vehicle. Service contracts provide some peace of mind that if something does go wrong, you will be covered.
Just one point of clarification – strictly speaking, warranties are included in the original purchase price of an item, whereas service contracts cover problems with an item after the original warranty has expired. In essence, they are doing the same thing, but as we will see, the coverage is not always the same.
By buying a service contract, you are essentially making a bet that the repairs on your car over the period that you own it will cost more than you will end up paying for the service contract. The chances are that you will lose that bet, but you might hit the jackpot, just like gambling in a Vegas casino (except your odds are probably better in Vegas).
Don’t believe all the ads you see from those selling service contracts which try to scare you with the potential cost of repairs. Consider that independent mechanics will often provide parts and labor at half the cost of the dealer or less – that is not an exaggeration. Finding an honest, knowledgeable independent mechanic can be difficult, but it is well worth the effort.
An alternative method for covering out-of-warranty repairs is to make regular contributions to a high-yield savings account on a regular basis, for the exclusive purpose of paying for repairs. This requires discipline and you are still making a bit of a gamble that nothing catastrophic will happen, but you’ll be glad you prepared in advance if your car ever needs repairs outside of warranty coverage (by automating your savings accounts, less discipline is required).
Personally, I have never purchased a service contract and so far it has been the right decision for me, despite always having exclusively owned used cars – only one of which had a few months left on the warranty. Maybe I have been lucky, but I think that putting in the effort of checking out the cars thoroughly before purchasing them and researching the model’s reliability ahead of time has played a large part in my good fortune. The last 2 cars I have purchased (newer BMWs) were inspected by professional mechanics, because the potential repair bills are higher.
Purchasing a Certified Pre-Owned vehicle is another option, though you will of course be paying a premium for this – less so if you are buying a CPO car from a private party (2nd owner or more). Here is Edmunds’ comparison of buying a CPO vehicle versus getting a service contract for a used car.
If you do decide to purchase a service contract, be sure to do the following:
- Read the fine print. Service contracts, especially those provided by third parties, can be very limiting in what is actually covered. Read and understand what you are getting before you buy – you don’t want to get surprised and find out that your car is only covered for the drivetrain when your moonroof gets stuck in the open position.
- Check out the provider. Service contract providers have gotten a bad rap – many of them for good reason. For example, US Fidelis currently has a Better Business Bureau rating of F. You’ve probably seen their ads on TV, which are pretty suspect in and of themselves. Not all providers are bad, but enough of them are that you should check them out before sending them a check.
- Go direct. If you are buying from a car dealer for whatever reason, don’t let them sell you a service contract that goes through a third party. They will be making a profit off of the contract, so you’re better off cutting them out of the equation and getting a deal with the provider directly.
If you decide to skip the service contract, make sure you follow these steps prior to purchasing:
- Research the model’s overall reliability using JD Power Dependability Ratings, Consumer Reports’ Guide to Car Reliability, True Delta and Edmunds’ True Cost to Own tool (this will estimate repair costs for you)
- Search for only low-mileage cars (7,500 miles per year if possible).
- See if you can find a Certified Pre-Owned car for a similar price, or one with a remaining warranty from the original purchase.
- Get a vehicle history report and look at the maintenance history with the dealership if possible.
- Ask the seller questions about every aspect of the car to get an idea of how well it has been cared for.
- Get a pre-purchase inspection by a professional mechanic of your choosing, not the seller’s.
For more information on service contracts, see the following links:
