Pros and cons of extended auto warranties

Surprise car repairs aren’t fun — they can lead to financial stress, missed work and even high-interest debt if you have to take out a loan to pay for them. An extended car warranty can help relieve the financial problems associated with a breakdown.

While some financial experts recommend setting aside money to pay for future repair bills, this advice isn't practical for everyone. If you have limited savings or have recently faced a major financial challenge, for instance, shopping for an extended auto warranty could be the right move.

There are two types of extended car warranties: those from the manufacturer and those from third-party providers. With both types, it's crucial to read the fine print so you understand your coverage limits and deductibles, how to make a claim and where you can go for service.

Pros of an extended auto warranty

An extended car warranty, also known as a vehicle service contract, isn't a one-size-fits-all answer to every vehicle issue, but it can come in handy if you have a surprise vehicle breakdown. The benefits of an extended warranty include:

• Financial protection if your car breaks down: Extended auto warranties cover specific types of mechanical failure. If your car breaks down, you can visit any repair shop approved by the provider for repairs, and you typically only have to pay the deductible specified by your contract.
• Customizable coverage: Depending on the auto warranty provider, you may be able to choose the specifics of your coverage, including your deductible. This can help you find a policy that fits comfortably within your budget and covers what you need.
• Peace of mind: Buying a car can be expensive and stressful. If you've kept up with routine maintenance on your current car, it may be smart to hang on to it as long as you can. An extended warranty can remove some fear of the unknown if one of your vehicle's major systems or parts breaks down.

Cons of an extended auto warranty

Extended auto warranties aren't right for everyone. In some cases, it makes financial sense to save the funds you would have spent on an extended warranty and put them in a savings account exclusively for future repairs. Before you buy an extended auto warranty, consider these cons:

• Can be expensive. The average cost of an extended auto warranty is $2,500 (plans typically range from $1,000 to $4,500). Your rates will depend on the level of coverage you select, your deductible and your vehicle's age and mileage. In 2019, drivers needing car repairs spent an average of $342 to $414, depending on the state, according to CarMD.com, although engine or transmission failures can be much more expensive.
• May not cover everything you need: OEM (original equipment manufacturer) extended warranties may provide powertrain or bumper-to-bumper coverage. In either case, the warranty covers defects in the car's parts and systems; there's no coverage for routine maintenance or failure due to a lack of maintenance. If you skip oil changes and your engine overheats or is damaged, you may be denied coverage.

  Third-party warranties could have even more coverage restrictions. Some warranty providers automatically deny claims if you can't prove the car has been serviced according to the manufacturer's recommendations. Others restrict coverage to a list of named parts and systems, although many offer bumper-to-bumper warranties.

• May not be transferable: While some extended auto warranties are transferable, others are not. If you plan to sell your car before you reach the age or mileage restrictions on the warranty, be sure you can transfer the coverage and that you know the refund policy.

Weighing the pros and cons of an extended auto warranty

Even with an extended warranty, you may need a separate budget for auto maintenance. The deductible may be high enough to cover the costs of most minor repairs, making the warranty less useful in the long run.

While it could make sense to buy an extended warranty to preserve your savings, avoid financial strain and keep your car in good working order, paying for additional auto coverage isn't the right move for everyone.

Does an extended auto warranty make sense for you?

For some drivers, an affordable extended warranty from a reputable provider is worth the cost. For others, this type of warranty means dealing with cumbersome claims processes, frequent claim denials and restrictive coverage.

An extended warranty often doesn't make sense if your car is still covered by the original manufacturer's warranty.

You may benefit from an extended warranty if you take time to carefully evaluate the provider and the warranty plan details. If you drive an older car and want to help ensure you don’t have to spend thousands of dollars to keep it running smoothly, you may want to consider a premium extended warranty.

If you’re shopping for a used car and plan to keep up with routine maintenance but aren't sure how you’ll pay for potential repairs, an extended warranty could provide the coverage you need at a fair price.

An extended warranty usually doesn't make sense if your car is still covered by the original manufacturer's warranty. Even though many dealerships try to sell extended warranties on cars that are already covered, you can't use the extended warranty until the original warranty is no longer in effect.

If your manufacturer only offers a powertrain warranty, however, a third-party wrap warranty can help cover other components that may break down.

Bottom line

If you have a used car that you want to drive for the foreseeable future and fear high auto repair costs, it could be wise to look into an extended warranty. This doesn't mean extending your coverage is a good use of your money, however. The decision ultimately depends on whether you want to pay for a contract that you may not end up using — or that may end up paying out less than you pay for the plan.

It's also important to carefully evaluate warranty providers. Not all companies have the same level of service, so be sure to read reviews for comments about claims handling. Study the fine print in any contract before you sign so you know exactly what you’re getting in the warranty.