Extended warranties aren’t for everyone, but they can be a good purchase for a lot of consumers. Here’s how you can decide if an extended warranty (aka service contract) is right for you:
1) Do you have the ability to pay for a big repair? The worst-case scenario with any vehicle is that a major part (like an engine or transmission) fails and you get stuck with a huge bill – $1,500+. The good news is that huge bills are pretty rare. If you feel confident in your ability to come up with that kind of money, than you may not need an extended warranty.
2) Are you buying a reliable vehicle? Before you buy a new or used car, you should spend some time figuring out how reliable it is. Do some reliability research on new cars, and check out our advice for figuring out if a used car is reliable. If you have any doubts about a particular car’s reliability, buying an extended warranty might be a good idea. Of course, if you have doubts, you should also consider buying a different car.
3) Is the car for someone else? Are you buying a car for someone else to use? If so, are you concerned that they might be taken advantage of? Extended warranties prevent your friend or relative from being talked into unnecessary repairs, especially if you’re not close by to help them out. [Far away college students and older relatives come to mind.]
4) Budgeting is easier than paying for repairs. Even if you can afford to pay for an emergency repair, there’s a budget advantage in buying an extended warranty – especially if you can finance the cost with your loan. Adding a comprehensive service contract to your car payment costs the same amount every month, ensuring that you know exactly how much you’re going to spend on repairs every month.
The main advantage in buying an extended warranty is that you don’t have to worry about repair costs. You pay up front knowing that whatever happens during the term of your service contract, you don’t have to worry about paying for repairs. We’ve seen warranties pay for new engines, transmissions, transfer cases, engine control modules, etc. They can definitely pay off. The main disadvantage in buying an extended warranty is that you may not get your money’s worth. If you pay $2,000 for a 6yr/100k mile comprehensive warranty, and your car never needs a repair, your $2,000 was wasted.
My official advice – if money’s tight, an extended warranty is a good bet. While you may not get every dollar you spend on an extended warranty back, there is a good chance you’ll need to fix something. Considering that a “cheap” repair is a few hundred dollars, buying an extended warranty – especially if it can be financed with your car – makes sense for a lot of people. On the other hand, if you’re well off enough to pay for repairs (even really expensive repairs), then an extended warranty is not for you.