In my experience in the car business, people have a love/hate opinion of extended warranties (a.k.a. service contracts). People love them when they cover a repair, but they hate paying for them. While I have some great extended warranty buying advice, I thought I’d share a story that reinforces one of my basic rules for buying an extended warranty. Always, without question, buy a manufacturer-backed extended warranty. Here’s why:
1) When you buy a warranty from an auto manufacturer, you’re buying great customer service. When a covered part breaks on your car, the auto manufacturer’s extended warranty will usually pay for your repair without question. Auto manufacturers understand that failing to cover a repair might influence your next car purchase decision, so they take care of you to make sure you come back to them.
After-market extended warranty companies, however, have no interest in maintaining a long-term relationship with you. Rather than cover repairs, after-market companies look for ways to deny coverage (even on ‘covered’ parts). Even worse, when an after-market warranty company does pay for a repair, they often don’t pay the full amount. The repair shop must then either discount their work or attempt to collect the difference between their normal rate and the rate the warranty company pays from you.
Bottom line – after-market warranty companies make money by denying your claims. Auto manufacturers make money by selling you more new cars. Don’t buy a vehicle extended warranty from an after-market company.
2) Manufacturer-backed warranties pay for better parts. Most of the time, a manufacturer-backed warranty will pay for OEM-quality parts. After-market companies, looking to save every dollar, rarely pay for OEM quality. Instead they’ll ask your repair shop to use after-market parts of lower quality, and in some cases they’ll only pay for used parts. Yikes.
3) Manufacturer-backed warranties will last. Here’s a scary story – a company called Automotive Professionals Inc. stopped honoring 250,000 service contracts when they filed bankruptcy in April 2007. The vast majority of those warranties are now completely worthless. The chances of this happening with a manufacturer-backed warranty are remote at best.
4) Manufacturer-backed warranties are easy to use. Finally, and perhaps most importantly, using a manufacturer’s extended warranty is easy. When you buy the warranty, most manufacturers enter it into their computer system. That way, when you go to any of their dealers, your warranty information is a few keystrokes away. Claims are just as easy too – most manufacturers have automated systems for processing extended warranty claims. Basically, all you need to do is show up. The manufacturer takes care of the rest.
Make sure to read our Extended Warranty Buyer’s Guide if you’re in the market for a new car, and remember to compare prices among different dealers before you buy a warranty.