When an Extended Car Warranty Is Worth It

Most new- and used-car dealers offer customers a free, limited warranty that covers a car for the first 60 to 90 days of ownership. In fact, some states require a minimum warranty period on any used car sold by a dealership.

Yet relatively few problems arise during that time period. That’s why dealers and third-party companies offer customers an extended warranty.

Think of it as repair insurance once the manufacturer’s warranty has expired. With such coverage, used-car owners reported paying a median of $1,000 for future service work they may never need if the car is reliable. But if hit by an expensive doozy of a problem—such as a busted camshaft or a blown head gasket—car owners may be glad they have an extended warranty. That is, if the warranty company pays the claim.

Consumer Reports has discouraged consumers from purchasing an extended warranty for a number of products, including cars. Why? It’s rare that the premium you pay will equal the amount of a paid repair claim down the line.

On the flip side, it’s just as rare to find a used car that has a confirmed history and all maintenance and repair receipts since it was new. And Consumer Reports has found that vehicle-history firms like Carfax and AutoCheck don’t catch all of the accidents that cars may have been involved in, especially if no insurance paperwork for the accident was filed or if a salvage history was “wiped.”

Wasted Money?

According to our survey, only about half of those who purchased an extended warranty for a used car from model year 2000 or later actually filed a claim over the past five years. That’s a lot of money spent for peace of mind. But most of those who filed repair claims wound up relying on their extended warranty multiple times.

About 30 percent of used-car purchasers who had owned their car for a year or less and purchased an extended warranty to cover it needed to use that warranty in the first year of ownership.

But two-thirds of drivers needed that additional coverage in years two through five of ownership.

And while the extended-warranty industry has taken a bad rap for not paying claims, 84 percent of used-car buyers who had to use their extended warranty said that all of their claims were honored. And 82 percent of all extended-warranty buyers said they would consider getting one again.

That said, we suggest setting aside the money you would spend on a warranty premium for a rainy-day repair instead.

Editor's Note: This article also appeared in the June 2016 issue of Consumer Reports magazine.

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