Buyers of used cars often wonder whether it is worthwhile to purchase a warranty to cover mechanical failures which occur soon after the vehicle is purchased. This aspect of the car-buying process can cause confusion and frustration. Below is an explanation of what warranties are, what they cost (if anything), and what IS and what IS NOT covered in a warranty.
A warranty as it applies to a used car is a contract between a buyer and seller and, in many cases, between the buyer and a third party -- the third party being a private warranty company independent of the dealer. The purpose of a warranty is to save the buyer major expense in the event of mechanical failure or breakdown of the vehicle covered. A good warranty will cover the major components of the vehicle -- engine, transmission, drive train, and axle. If a warranty does not save money, set the money aside for future repairs.
Promises, Implied Warranty and "As Is" Law
It is critical to put the seller's claims about the fitness of a vehicle, repairs already done, or prospective repairs in writing. Take notes during conversations about specific vehicles. When a seller or dealer makes a promise, write it down and have the seller sign the agreement on the spot. This is also a way to learn a lot about the seller. If the seller signs, the deal can go forward. If the seller won't sign, perhaps there was never any intention to fulfill the agreement.
The old adage "get it in writing" was probably coined to describe used-car warranties. The Federal Trade Commission (FTC) and every state in the country have laws covering implied warranty. Implied warranty is the government's way of saying that anything you buy must function for some reasonable period of time in the manner for which it was designed. With a used vehicle, "reasonable" is ambiguous enough to cause the kinds of concerns that lead consumers to consider the purchase of an extended warranty.
Consumers should not rely on the implied warranty. The Federal "As Is" law requires dealers, but not private sellers, to post a window sticker on each vehicle for sale. It must include the warranty disclaimer spelling out details about what is and or if a warranty is even available for a particular vehicle. Dealers are required to reveal all they know about problems with the vehicle. This information is supposed to be clearly listed on the back of the used-car window sticker. This part of the "As Is" law is designed to help with the nebulous nature of implied warranty. More importantly, the "warranty disclaimer" will have a section spelling out that it supersedes any and all implied warranties, and it will be one of the documents signed when consummating the purchase.
If there is a slight "clunking" noise in the transmission, and the dealer tells you "oh, if it becomes a problem, we'll take care of it" -- put it in writing. If it isn't spelled out on the disclaimer that the transmission assembly is a covered component, the dealer is under no legal obligation to repair it. It is possible to get a problem resolved under the terms of an implied warranty, but chances are you will have memorized the phone numbers of your state consumer protection agency and attorney before that happens. If the disclaimer states that there is no warranty on the vehicle, then the dealer is under no obligation to repair anything, with the possible exception of safety-related items, once the car is sold.
In-House Warranties And What They Cover
Dealers themselves cover the repairs on In-House warranties are those warranties where the dealers themselves cover the repairs. The agreement is with the seller directly and generally no third party is involved. The coverage provided by these In-House warranties varies greatly. The only way to be sure what a used-car warranty covers is to have the systems and components that are and those that are not covered listed on a document that you and the dealer both sign. Make sure to receive a copy. Generally, if the dealer is going to assume responsibility for warranty repairs, only the major components of the vehicle (engine, transmission/transaxle assembly, and axle assemblies) will be covered.
In most cases, a used car has the terms of the warranty spelled out on the warranty disclaimer window sticker. The coverage can run anywhere from 3 months/3,000 miles to 12 months/12,000 miles. This is a whichever-occurs-first situation. If the warranty is for 12 months/12,000 miles, at the end of 12 months, or once you have put 12,000 miles on the car, the warranty period is over. If you have owned the vehicle for eight months, but have driven 14,000 miles, the warranty is no longer in effect.
Extended Warranties And What They Cover
An Extended Warranty is a contract between the buyer and the warranty provider -- a company whose business it is to provide cost assistance and/or reimbursement coverage for vehicle repairs. Generally the warranty company is not owned by the dealership. The dealer is merely acting as an agent for the company.
Extended Warranties are sold both by dealers and third parties. The warranty is backed by a company like G.E. Capital, Ford, Chrysler, Saturn or Warranty Direct at http://www.warrantydirect.com. Depending on what they cover, Extended Warranties run $500 to $1,500 or more for a two or three year period and the price is negotiable. Price is based on the profit margin the warranty company experiences. Warranties are highly profitable items to the seller because most don't cover the kinds of problems that commonly occur with used cars and many people who have warranties never use them, even when they can.
What Extended Warranties cover varies considerably as the scope of coverage is different depending upon the level of protection purchased. Most basic plans cover only the major component assemblies like the engine, transmission/transaxle assembly, and axle. Deluxe plans can cover just about every system on the vehicle and, in some cases, provide towing and use of a rental car while your vehicle is being repaired. There are many warranty companies offering different provision combinations. The better ones will cover more of the major component assemblies. The three levels of Extended Warranty are:
- Standard, Basic or Silver generally covers the engine, transmission, transaxle and final drive assembly (rear axle in a rear wheel drive for example).
- Premium, Plus or Gold covers everything listed above in addition to brakes, calipers, water pumps, alternators, the various wear-and-tear components (master cylinder in the brake unit, air-conditioning compressor and heater core).
- Deluxe, Premier or Platinum covers everything listed above plus more exotic components, computer fuel injectors, sensors, switches (throttle and coolant and temperature sensors).
There is no consistency between plans. Investigate each plan thoroughly and compare one plan to another. Make sure to see if the policy covers the Antilock Braking System�� if the car is so equipped. The ABS system can be extremely expensive to fix or replace should something go wrong.
Salespeople and dealers do receive a "kickback" or "commission" for selling an Extended Warranty. There is nothing dishonest about commissions. Commissions are part of the process of making services available to the public. Both the salesperson and the dealer earn the commission -- 80%-85% of warranty profit, whatever that may be. The salesperson will receive a flat rate, while the balance goes to the dealer.
Should You Buy An Extended Warranty?
"Maybe" if you are willing to do the research necessary to find a useful warranty. If not, the answer is "No."
The length of time you plan on keeping the vehicle, as well as the cost of the vehicle, are part of the "should I buy an Extended Warranty" equation. If your car and circumstances meet the criteria and the warranty is good, it can be a worthwhile investment. Otherwise, it is better to save the cash for future repairs.
A general rule of thumb for determining whether to buy a warranty is, if the used car you are buying is priced at 50% or more of the cost of a comparable new model and you can find a good policy, buy the Deluxe Extended Warranty. This is particularly important given the complexity of modern cars, your dependence on the car, and how long you plan to keep it.
Some repairs that were considered routine a few years ago can now cost thousands of dollars! The newer the vehicle, the more likely it is to have expensive-to-repair high-tech systems. Because the car is newer, you may plan to keep it for a longer time and be more likely to need a Deluxe Plan. If you drive rarely and can afford to be without a car for a few days while it is being repaired a plan with a rental-car provision isn't really necessary. Perhaps a Premium or Basic plan will do the job.
For example, if the new version of the car costs $20,000 and the used model $10,000 at this price it is likely that a few of the more complex or high-tech items a "Deluxe" plan will cover will go wrong and you'll be able to use the warranty. A $1,500 or more policy won't go to waste. But, if the new car costs $20,000 and the used costs $5,000 (because it is much older than in the previous example) just get the "Basic" version. It isn't worth spending a great deal of money on a policy that covers items an older car doesn't even have. Hopefully the car has been maintained well enough (and you've checked that with a mechanic) that the alternator, water pumps, etc. have already have been replaced and won't go wrong before you buy again. But, if the $3,000 or $4,000 transmission goes bad, you'll be covered.
There is an important exception to the above rule. If the car is less than five years old and has less than 50,000 miles on it, find out if it is still covered under the original manufacturer's warranty. Visit any Web Site listing manufacturer's specifications for older models like Edmunds at http://www.edmunds.com/edweb/used/usedcars.html. Or you can call the local dealer handling the model. They can tell you if a factory warranty still covers the vehicle. What you want to know is the length and mileage of the original warranty (5/50,000 or 3/30,000). It the prospective car is less than three years old or has less than 36,000 miles on it, chances are it is still covered. An Extended Warranty may not be indicated in this case. Consider a warranty that extends the Manufacturer's Warranty without superseding it.
With the majority of manufacturers, the factory warranty "follows" the vehicle, regardless of ownership. Therefore be cautious when buying an Extended Warranty on a vehicle with an active Manufacturer's Warranty because most Extended Warranties supersede those from the manufacturer. So, if you purchase a used car with both time and miles left on the warranty and then buy an extended contract, more than likely you'll throw away the original coverage. Again, most Extended Warranties supersede the Manufacturer's Warranty and are not added onto the end of it. Ask which is the case. If the Extended Warranty is one that is added on after the Manufacturer's Warranty expires, confirm that in writing.
Before purchasing a used car that is still under the Manufacturer's Warranty, determine the original delivery date of the car. The coverage clock starts running on factory warranties from the date the vehicle was originally put into service. If you buy or lease a current model year "demonstrator" (which is considered a used car for all intents and purposes), the clock started running on the warranty "time" portion of the coverage the day the car first started being used as a demo, not the date you purchased it! Where people get stuck in this situation is when they buy a demo model that is six months old -- put in service on the day it arrived at the dealership. It has 1,000 miles on it when sold. There are 2.5 years and 35,000 miles left on the original Manufacturer's Warranty. That might seem great -- lots of time and miles left -- but the new owner would have to drive 14,000 miles a year to use the warranty to its fullest extent. That could be a lot of miles to put on a car in a year, depending on your driving habits, and the warranty might expire long before the 36,000 mile provision is reached. Not the most efficient use of the original warranty.
Remember, Extended Warranties do not cover routine maintenance, such as oil changes and tune ups. Nor do they cover damage caused by accident or abuse. Under the terms of any contract, the buyer is responsible for maintaining the vehicle per the manufacturer's recommendations. Failure to do so can cause the Extended Warranty to become null and void.
If a breakdown necessitates a major repairs, you may face many days without your car. This can occur when the warranty company sends one of their employees to the dealership to determine if the breakdown was due to a mechanical failure or something you did or failed to do, before agreeing to cover the repairs.
Buying An Extended Warranty
Buy either a brand-specific warranty such as a Ford-backed warranty for a Ford product, or a warranty from a large, national company like G.E. Capital. This way, when you travel or relocate and experience car trouble, a local dealership can perform the needed repairs.
The recommendation to G.E. Capital does not mean their products are necessarily good or right for your needs, so it is still necessary to carefully review their warranties. But they are possibly the largest aftermarket warranty provider in the U.S. As such, their warranties are honored by hundreds of dealerships and thousands of independent repair shops nationwide. When buying from a corner used-car lot, think twice about purchasing the Extended Warranty there. Chances are its coverage will be very restrictive as to what and where to obtain repairs. Call the automaker for the car you are buying and ask who supplies warranties, visit the Warranty Direct web site at http://www.warrantiesdirect.com or call G.E. Capital to request, review and purchase what you need.
Know What You Are Buying
The best advice is read and understand the Extended Warranty under consideration. Make particular note of any exceptions to the coverage. For instance, if a brake caliper were to become stuck and cause the brakes and brake rotors to wear out prematurely, the brake caliper might be covered under the terms of the warranty, but the additional expense of replacing the brake pads and rotors may not be covered. Look for phrasing like "This warranty does not cover consequential damages. This warranty will cover the failures of a covered component only." This means that if one thing goes wrong and damages another that the "another" is not covered. In other words, if the caliper gets stuck, only the caliper and its repair will be covered. If a policy covers everything, there won't be exclusionary provisions like the one mentioned above.
An Extended Warranty must cover major component assemblies like the engine, transmission/transaxle assembly, water pumps, alternators, air-conditioning compressors, brake calipers, constant velocity joints, wheel bearings. And more if you can get it.
Extended Warranties usually don't cover belts, hoses, brake pads, all the normal wear-and-tear items and high-technology features like electronic components, coolant temperature sensors, mass airflow sensors and fuel pumps.
An Extended Warranty generally doesn't cover bundled coverage of electronic components, the Antilock Braking System and its computer called the Electronic Braking Computer (EBCM). However, these components can be negotiated into the warranty.
In Conclusion
Before buying an Extended Warranty, obtain several to read, review and compare. This will help learn the language and understand what is covered. Have a mechanic look over the policies you are considering and get an opinion based on a review of the car and predictable problems. Make sure that all the major systems and their failure are covered. Be sure to find out if the car is already covered by an existing Manufacturer's Warranty. If so, purchase a warranty that extends the Manufacturer's Warranty, but does not supersede it. And, most importantly, get any promises in writing with two signatures -- yours and the person making that promise. That way, if there is ever a question about what is covered, the proof you need to get the services that were agreed to are close at hand.
In the warranty business, there are a lot of people making a lot of money selling inferior products. This is definitely a "buyer beware" situation. In an ideal world, companies would provide health insurance policies for cars. But they don't.
