Extended Warranties: To Buy or Not to Buy?

Why buy an extended warranty?

Extended warranties are a good idea if they cover vehicle systems that are likely to fail during the warranty period. You can check the APA's Lemon-Aid reviews or Consumer Reports for the predicted reliability of a vehicle you are planning to buy. If you are buying a used vehicle and money is tight, a complete used car warranty will provide some predictability for your budget, even if a major breakdown were to occur.

Where your warranty dollars go

30-60% repairs, 25-50% dealer commission, and 10-20% warranty company administration and profit. Dealers will rarely negotiate the price of an extended warranty. New car dealers typically mark up their manufacturer's warranty by 25%-30%. Both new and used car dealers mark up third party warranties 50%-100%, and sometimes even more. The used car department of a franchised dealership will occasionally recommend an aftermarket warranty over their own manufacturer's brand -- when they do, it's almost always because the aftermarket warranty offers a higher profit. 

When can an extended warranty be purchased?

For a new vehicle, the extended warranty must usually be purchased within the first year or some other timeframe specified by the manufacturer. Used vehicle extended warranties have to be purchased with the vehicle.

Guidelines to follow when considering an extra-cost warranty

Domestic vehicles tend to require more expensive mechanical repairs and maintenance after the 5th and 6th years. Japanese vehicles tend to require more expensive mechanical repairs after the 7th and 8th years. Extra-cost warranties offer good value for many luxury cars because repairs to these vehicles can be expensive and unpredictable (Audi, BMW, Cadillac, Jaguar, Lincoln, Range Rover, Volvo, Saab, etc.)

Automaker warranties preferred

When they're available, automaker extended warranties are recommended over third party warranties. Coverage is more complete, and manufacturers tend to honour claims more easily and with fewer restrictions. Third party warranties companies can become picky if the dealer who sold you the warranty is experiencing many claims from his other customers. Manufacturer extended warranties are covered at all dealerships selling their brand nationwide (United States coverage by permission only), so warranty repairs are available at any dealership. That's not the case with most aftermarket warranties.

Extended warranties from the manufacturer are transferable to another owner. In most cases there is no fee for transferring the warranty. Warranty transfer fees are prohibited in Quebec, Sasketchewan and Prince Edward Island. (A warranty transfer may be refused or the warranty may be voided because of a major accident or non-compliance with the maintenance schedule, like evidence that oil changes were not performed).

Where to get a Used-vehicle Extended Warranty?

1) From the manufacturer at any franchised dealership, when the vehicle is being offered for sale by the dealer.
2) From an independent warranty company through a new car dealer or an independent used car dealership.

Neither will sell directly to consumers in a private sale. By special arrangement with a dealer in Ontario, APA members who wish to purchase a warranty on a used vehicle they already own or are buying privately can do so, subject to a pre-purchase inspection.

No third-party checked the vehicle before a warranty was issued

Most consumers believe that a warranty implies an inspector from a company other than the dealer checked out the vehicle, and salespeople will sometimes talk up a used vehicle warranty as evidence that the vehicle is in great shape.  This is a misconception: dealers self-certify their vehicles. Even an automaker "certified" used car warranty will occasionally cover a lemon. APA has seen vehicles with undeclared collision repairs that reduced their market value, oil leaks and fairly worn tires being sold as automaker "certified" used cars. When it comes to independent dealers, the used car inspection standards are even more variable. No warranty company selling to independent dealers performs third-party inspections because they're afraid to lose the dealer's business. That's why the APA recommends an independent inspection by a third party working for the buyer before you buy a used vehicle. In fact, we believe in the pre-purchase inspection so strongly that the contact information for our recommended inspection services in Toronto, Montreal, Calgary and Vancouver are offered to the general public with no requirement that you join the APA to use them.

Questions you should ask when purchasing an extended warranty?

1) Is it a manufacturer extended warranty?

2) Is the extended warranty zero deductible?

3) What is the dollar limit per claim? (no limit, or the value of the car is best)

4) Is the warranty bumper to bumper or does it only cover specific systems? (see chart below)

5) How long does the warranty last and what is the kilometre limit? (Look for at least 6 years on a new car)

6) Does the warranty covers the electrical system and air conditioning? The air conditioning should be covered in an extended warranty but you may have to pay extra for it. After      the sixth year, it's quite likely  to need a repair, even on reliable models.

Recommended strategy after purchasing a warranty from a new car dealer

With an automaker warranty, it's a good idea to establish an initial service record by taking a new vehicle for the first 6 months to a year to the selling dealer for regular maintenance (oil changes and minor inspections). After this initial history is established, the customer may prefer an independent shop where prices are usually lower. Request a written record of the work done on your vehicle, and have the owner's manual or maintenance guide stamped. The most common causes for rejecting a warranty are negligence, abuse, and normal wear and tear. Complete maintenance records make it harder to refuse a claim. 

What to consider before purchasing a new vehicle warranty:

1) APA New Vehicle Predicted Reliabilty (See Lemon Aid Car Reviews for your specific vehicle)

Below average vehicle: Good idea
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Average Luxury or European vehicle: Good idea, repairs can be expensive
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Average reliablity: Probably not needed
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Above Average reliability: Not needed

2) Warranty Company:

Independent (depends on company): Good, OK or AVOID
Auto maker or related to manufacturer): Best

3) Components covered:

Power train (Engine, turbo, transmission, CV joints): OK

Major components (Radiator, steering rack & pump, ball joints): Better
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Major components plus air conditioning (condenser, evaporator & compressor) , Electrical (power windows, doors and seats): Good
Both systems could need expensive repairs after 5-6 years

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Bumper to Bumper: Best
Note: Should cover brakes and shocks (like a new car, almost)
Not included: pads, shoes, rotor & drums
Price around $1500-$3000 for 6 years on a new vehicle


4) Duration

New Car 3 years or 60,000 km (included with new vehicle): Standard
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Extended Warranty offering full coverage up to 4th year or 80,000 - 100,000 km
Duration: Poor
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up to 5th year or 100,000 km: OK
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up to 6th year or 120,000-160,000 km: Better
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up to 7th year or 120,000- 160,000 km: Best

APA's full report titled Used Vehicle Aftermarket Warranties (2004) can be downloaded here. [pdf]