By Stacey L. Bradford
WITH CONSUMERS' WALLETS feeling light these days, nobody wants to shell out major bucks for an auto repair. This makes the promise of an extended auto warranty particularly enticing. The pitch: For an upfront fee of, say, $900 (that you could roll into your auto loan) you won't have to reopen your wallet for the next seven years or 100,000 miles. Sounds like a pretty good deal, right?
Maybe not. Extended warranties (also known as service contracts) are often better deals for the dealer than they are for the consumer. "Service contracts can sometimes get very expensive and are not necessary," says Jeremy Anwyl, president of Edmunds.com, a car-information Web site. "They can be a huge profit center for the dealership." In fact, in some cases dealers may make more money off the extended warranty than they do off the car sale itself, says Anwyl.
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Here's what you need to know to avoid being taken for a ride:
Better Cars
In case you haven't noticed, "cars just don't break like they used to," say Anwyl. Manufacturers have consistently improved reliability, so newer models typically don't incur pricey repairs. In fact, based on consumer complaints, new vehicle quality increased 10% over the last year and 24% over the last five years, according to J.D. Power & Associates.
Consumer Reports, which surveys car owners annually, has similar findings. For the 2002 model year, consumers reported an average of just 18 problems per 100 vehicles. That's down from 21 problems for the 2001 model year and a whooping 88 back in 1980.
And what about those cars that do have problems? Not surprisingly, it's only after years of use that costly repairs are typically incurred. According to the folks at Edmunds.com, a transmission, for example, should easily last 100,000 miles, while an engine should keep revving for 200,000 miles. By the time those benchmarks are reached, most extended warranties have expired.
Hidden Costs
Of course, some cars do need major repairs during the first seven years of ownership. But should that happen, extended warranties aren't always the panacea that consumers expect. Most service contracts cover what the industry calls "powertrain" items, which are the components such as the engine and transmission that help your car run. Those annoying wear-and-tear items, like squeaky brakes and flat tires, will most likely still be your responsibility, warns Consumer Reports spokesman Douglas Love.
And even if your repair is covered by the warranty, you may still have to dig into your own pocket to pay a deductible. If you aren't careful, you could end up signing up for a policy that requires you pay a $50 deductible per repair, not just per visit. So if the fuel-injection system and front drive axle start acting up, you'll have to shell out $100.
Here's another dirty little secret: In some cases, even items that should be covered are denied. This is more likely if you purchase a warranty from an independent company rather than one offered directly through your car manufacturer. (We'll discuss the differences between these two types of warranties later.) "Any time [the independent companies] can, they will look to deny coverage," says Phil Reed, an automotive expert with Edmunds.com.
While statistics supporting this are hard to find, anecdotal evidence suggests that this is indeed the case. The message boards at Edmunds.com reveal many complaints of repairs that consumers believe should have been covered, but weren't, by their independent policies. In some cases, the problem may be that consumers discovered the true limitations of their policies only after they've filed a claim. Warranty Gold — one of the more respected independent extended warranty companies — said in a written statement to SmartMoney.com that coverage may be denied because a claim is for "a component that is not covered or [because] the breakdown may be a result of an obvious lack of proper maintenance." So be sure to read the fine print.
Another problem: In some cases repairs are delayed until an adjustor can inspect the vehicle — a process that could take weeks. Just ask Vicente Brown. In July 2001, the Newark, N.J., resident had to wait two months before Warranty Gold's administrator, Interstate National Dealer Services, would authorize payment for a new transmission for his 1995 Oldsmobile Aurora. During that time, the company sent adjustors to examine the component and he had to fax multiple copies of proof of routine oil changes. "I'm the kind of guy who babies my car and keeps all receipts, so it wasn't a problem," he says. "But what does the oil have to do with a transmission?" Warranty Gold has since severed its relationship with Interstate National Dealer Services.
Buy a Better Car
If the idea of unexpected repairs makes you reach for the Xanax, your best strategy might be to buy a car with a proven maintenance record. Fortunately, you don't have to spend a lot of money to get a trustworthy car. Plenty of models priced around $20,000 win reliability recommendations from both Consumer Reports and Edmunds.com. Examples include the Honda Accord, Mazda MX-5 Miata and Toyota Corolla.
Want that promise in writing? Then look for a car with a long original factory warranty (which automatically comes with the vehicle). While the average warranty is three years or 36,000 miles, plenty of auto makers offer better deals than that. For example, if you were to buy an Oldsmobile, Hyundai or Kia, you could get a bumper-to-bumper warranty (which covers just about everything except for wear-and-tear items) for five years or 60,000 miles. In addition, if something were to happen soon after the warranty expired, you could qualify for an After Warranty Assistance (AWA) program. This service provides coverage for repairs that happen right after their factory guarantee runs out.
Ironically, it's the more expensive models that may leave you high and dry. For example, luxury cars such as an Aston Martin or Lamborghini are only under warranty for two years. Of course, if you can afford one of these beauties, a little time in the shop shouldn't hit your pocketbook too hard.
If You Do Decide to Buy a Warranty...
In some cases, purchasing an extended warranty may be worth considering. For example, new (unproven) car models are prone to more problems than the average car — so if you're the type who wants the latest model, an extended warranty could be worthwhile. But before you sign on the dotted line, keep these last few points in mind.
First of all, experts recommend you put off your purchasing decision until your original warranty is nearly up. At that point you should have a better idea of how long you plan to own the car, and you'll also know if you have a clunker that needs additional protection. "It's rare that a car will run well for five years and then blow up," says Karl Brauer, an automotive expert with Edmunds.com.
When shopping for a policy, you'll be faced with a choice: You can either go with a factory-backed warranty or an independent contract. Salespeople may pitch you an independent warranty, but keep in mind that they typically earn a larger commission off these policies. A factory-backed warranty (while often a bit more expensive) is usually a better way to go. That's because when you take a car in for repairs, dealers prefer the factory-backed warranties, since they're familiar with the terms. (With independent warranties they've never worked with before, they may fear getting the runaround.) In addition, because the factory-backed warranties come from the manufacturers themselves, there's more of an incentive to keep their customers happy.
Finally, like everything else about the car-buying experience, extended warranties are negotiable. And with markups as high as 100% to 200%, unprepared buyers could easily be taken for a ride, warn industry experts. So even if you know that you're going to go with the factory warranty, be sure to shop around, since prices can vary by dealer. Your best strategy is to go online and get quotes from individual dealerships across the country, as well as the independents such as Warranty Gold and 1SourceAutoWarranty.com. Once you have a few quotes, ask your dealer to match the price. If he won't, take your business elsewhere.