If you’re buying a new or used car, you’re probably going to be offered an extended warranty (aka service contract). Dealerships and banks often sell these products, and for good reason – they provide security and piece of mind. However, if you’re not careful, you could end up paying too much or getting the wrong coverage. By the way, if you’re not sure about buying one in the first place, check out Should I Buy An Extended Warranty before you read this. Without further delay, here’s what you need to know about buying an extended warranty:

1) Don’t call it a warranty. While the common term is “extended warranty,” the correct term is actually “service contract.” What’s the difference? Warranties cover defects only, a service contract provides service to a specific set of parts regardless of why they failed (except for abuse and acts of God).

2) Only buy a service contract backed by an auto manufacturer. Simply stated, manufacturer-backed service contracts are the best. Buying a service contract from an after-market vendor can be a complete waste of money. After-market service contract companies often dispute claims, they’re difficult to work with, and they sometimes fail to pay all your repair costs. The auto manufacturer wants to sell you another car someday, so their service contracts are usually excellent in terms of coverage, ease of use, and customer service. Read more about why you should buy a manufacturer-backed warranty

3) Buy the best coverage. Don’t bother with buying anything less than a comprehensive service contract. What you’re looking for is a service contract that covers everything on the car, excluding wear and tear items. Buying the best coverage makes sense – even a repair of a small trivial item, like a bad power lock switch, can cost hundreds of dollars. Why not cover every part? Besides, buying lesser degrees of coverage usually doesn’t save much money. In many cases, the cost difference is a few hundred dollars. Get the highest level of coverage and you’ll be glad later.

4) Buy the longest term you can (provided the mileage makes sense). When you buy, try and match your coverage years with the miles you’re going to drive. For example, if you drive 15k miles a year, a 6yr/100k mile service contract makes sense. If you drive 10k a year, a 7yr/75k mile service contract would be better. Whatever you do, get the most you can – service contracts are most valuable in the last year of their coverage. Having said that, don’t pay for a service contract that lasts less than a year. They’re rarely cost effective.

5) Compare prices. This is the most important part of buying a service contract – since you’re only going to buy a manufacturer-backed service contract, you need to compare prices at lots of dealerships. The standard practice at most new car dealerships is to sell service contracts for $800-$2000 over cost. That kind of profit margin can easily double your expense. So, when you’re offered a service contract, find out what the up-front cash price is. Next, write down that price and ask if that’s the “best price” they can give you. Finally, tell the finance person that you’ll think about it and get back to them soon. When you get home from the dealership, call around to other competing dealers and ask them for their best price. A few minutes worth of work can save you a few hundred dollars.

6) Read the service contract. The vast majority of dealer employees are honest, however, that doesn’t mean you should trust everyone you meet. When it’s time to pay for your service contract, make sure to read it carefully. Be sure you understand the level of coverage you’re buying, the number of years and miles that you can drive while covered, and your deductible. Also, make sure the contract is for a manufacturer-backed warranty. I’ve heard of a few dealership personnel selling someone a after-market service contract and telling them it was factory-backed.

7) Check out the manufacturer’s service contract online. Most manufacturers have great websites that explain their coverage – just remember that the price online isn’t necessarily the price you’ll pay. Ford, for instance, sells their service contracts to their dealers for much less than they’ll sell them direct to customers. Your local Ford dealer can often beat the price you find online by a few hundred dollars – the same goes for Toyota, GM, and a host of others. In fact, the price you find online should be the most you pay.


Here are some links to manufacturer’s service contract websites with more information:


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