Buying a Car Extended Warranty

A family member asked me to help him buy an extended warranty for his car. I got the enviable job because the extended warranty costs a lot of money (over $1,000) and I have the reputation in the family for getting good value for money.

Is an extended warranty on a car “worth it”? The standard advice you hear about extended warranties is that they are not worth it. I disagree. I must say it depends. It depends on what price you pay and what you get for that price. The coverage is worth something. If you pay a low enough price for the right coverage, you can make the extended warranty “worth it.”

Let me begin with what NOT to do when you buy an extended warranty.

1. Don’t buy it from the dealership at the same time when you are buying a new car. New cars are covered by bumper-to-bumper manufacturer’s warranty, typically for at least 3 years or 36,000 miles. The extended warranty kicks in only after the manufacturer’s warranty runs out.

You have plenty of time to see how the car holds up while it’s covered by the manufacturer’s warranty. If it looks like it’s rock solid, you don’t have to buy an extended warranty. If after 2-1/2 years you think you are not going to keep the car for long, you don’t have to buy an extended warranty. The extra time for making decisions and the opportunity for observation have value. Don’t give up that value.

Also, when you are buying a new car, you get only one offer for the extended warranty. There’s little chance to shop. You don’t know if the dealership is offering the extended warranty at a fair price or not. If you buy the extended warranty together with your new car, chances are you will overpay by a lot.

2. Don’t buy an extended warranty plan unless it’s backed by the manufacturer and honored by all dealerships. There are extended warranty plans offered by third parties. I think the chances of getting a repair covered by the manufacturer is a lot higher than getting it covered by a 3rd party because the manufacturer is usually interested in building some loyalty from the owners. I have no scientific proof for this. It’s just my opinion.

Most (all?) car manufacturers have their own extended warranty plans. They call them by different names, for example:

  • GM Protection Plan (GMPP)
  • Ford Extended Service Plan (Ford ESP)
  • Toyota Vehicle Service Agreement (Toyota VSA)
  • Honda Care
  • Volkswagen RealDriver

You just have to remember to shop for the extended warranty when your manufacturer’s warranty is about to run out.

Now, how do you shop for an extended warranty if you decide to buy one?

3. Shop from any dealership, including out-of-state dealerships. All dealerships of the same manufacturer are authorized to sell the same extended warranty to all customers. The dealership is not on the hook for the warranty. The manufacturer is. You don’t have to buy it from the same dealership where you bought your car. Your don’t have to buy it from a dealership in your local area either.

Extended warranties have a high markup in the MSRP. Never pay MSRP. The markup on the extended warranty is pure profit because the dealership does not have to do anything to it until there’s a sale. They just fill out some forms and collect the sales markup. If an out-of-state dealership has a willing customer calling them, ready to buy, they will much more likely offer a good price, because they know the customer is shopping for price and only a good price will get the sale. A quick sale for $100-200 profit is so easy.

4. Shop by phone, not online. Yes, the old fashioned telephone. You are unlikely to find really good deals online, because the manufacturer discourages posting discounted prices online. One “rouge” dealership ruins the fat profit for everybody. If you call and make an offer that still gives the dealership a reasonable profit, they will gladly accept the easy profit.

For the kind of extended warranty I was asked to shop for, I came to the conclusion that the cost to the dealership is 50% of MSRP. I got quotes for the same plan from three dealerships. Based on the 50% of MSRP number, here are their markups:

Quote – 50% of MSRP
Dealership #1, local $700
Dealership #2, online $500
Dealership #3, out of state, by phone $200

You see the difference?

I sent my family member to dealership #3. Everybody is happy. He’s happy to have peace of mind and he saved at least $300. The dealership got an easy $200 profit. All I’ve got is this blog post. 🙂

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  1. The Incidental Economist says

    Can you extend your reasoning to address the following?

    1. The manufacturer knows more about the vehicle than any consumer does. Therefore, on average shouldn’t the advantage be to the manufacturer? Shouldn’t the price of the repair insurance (that’s what it is) be higher than the expected cost of repairs?

    2. Having such insurance may motivate the holder to visit the dealer more often than (s)he would otherwise. Not all repairs are covered. Dealer repair costs are much higher than a non-deal repair shop. Won’t this lead to higher repair bills for non-covered repairs? (Visit to find mechanics recommended by the Car Talk community.)

    Together, points 1 and 2 are what have always led me to ignore any thought of buying an extended warranty for a car. The only argument I can see for it being a good idea is if you know you have a crappy car. That is, you know you are a worse-than-average risk of using the repair insurance. I think if I were confident enough in that opinion I would try to sell my car and get a better one.

    • Jerry smith says

      I purchased an extended warranty for my Ford F-350 from Zurich at a cost of $2,200. Over the next 5 years Zurich never denied a claim paying out close to $30k over the term of the warranty.
      Anyone who’s been to a dealer for repairs knows how expensive it is. My engine is a diesel so repairs are even more so.
      This is my 3rd extended warranty and each has more than paid for itself. Zurich is by far the best warranty company I’ve dealt with.
      There you have it, for what it’s worth.

  2. Harry Sit says

    TIE – Thank you for your comments and questions.

    1. First of all, it wasn’t my decision to buy an extended warranty. I was only asked to shop for one.

    2. Second, like any insurance, the insurer is expected to make money on average. That doesn’t mean all insurance is bad for the insured. After all, we buy insurance all the time.

    3. This family member already uses the dealership for all services, even for oil changes. He’s had multiple bad experiences with 3rd party shops and he’s happy with the dealership’s repair service. He thinks the predictable outcome and efficiency is worth the price he’s paying.

    4. The specific extended warranty program I was asked to shop for covers everything except windshield wipers, battery, brake pads, and tires (“wearable” items). The cost differential on non-covered repairs is minimal.

  3. The Incidental Economist says

    TFB, on your point no. 2, we agree that the insured pays a risk premium. On average that is a loss. What one is buying with the risk premium is protection from variation. What that is worth to an individual depends on that individual’s risk aversion. I would argue that for the vast majority of people and for all but a few types of insurance, the risk premium is not worth it.

    For anything that could be financially catastrophic (loss of your home, severe health problem) it is sensible to pay the risk premium for most people.

    For some people loss of a vehicle through accident or collision is a large enough financial shock to warrant insurance.

    Vehicle repairs could be costly for some people, but the size of the population for which insuring for those makes sense has got to be smaller than for the foregoing types of events.

    Then there are less expensive appliances for which extended warranties are offered. These have got to be a bad value for almost everybody.

    My rule is that if I can afford to self-insure I do so. That leaves me only buying insurance for health, disability, life, home, auto collision/accident (newer vehicles only), and various forms of liability coverage. I’ve never bought an extended warranty and it is hard to imagine I ever will (I get some extended coverage for some purchases via my Am. Ex.).

  4. Harry Sit says

    The price has to be a crucial factor. It is conceivable that the manufacturer runs an underwriting loss while creating a profit opportunity to the dealers because doing so helps the manufacturer sell cars. The manufacturer does not have to make money from these on a stand-alone basis. If you cut down the dealer markup, you get closer to the true economic value. If you can buy a 100,000-mile extended warranty for $1, I’m confident you will buy it. If it’s $100, it’s still a good price. $5,000? Probably not. Therefore everybody must draw a line somewhere.

    Buying a warranty is not new. Whenever we buy a new car, we also buy a warranty. That warranty comes “free” but the price is built into the price of the car. I think the trend is increasing the warranty coverage, not cutting it and selling the car at a lower price. Some new cars also come with “free” maintenance for a few years. People buy new cars with free warranty and cars with free maintenance all the time. It’s not irrational. People make decisions based on price and value received.

    Therefore I must say “it depends” when it comes to whether one should buy an extended warranty. The very first question is “at what price?” The next question is “what do you get?” Come think about it, it’s not different from any other purchase decision, is it? Is a Honda Civic worth $X? Is a Ford Focus worth $Y? Are leather seats worth $Z?

  5. Arvind says

    I’ve heard some extended warranties pay you most of the money back after the warranty period if you never use it. Anyone know if this is true? That’s what a dealer told me once.

  6. Daddy Dub says

    Came back to this again for a re-read and I like the caveat about “it depends”. The answer to almost every question is that the devil is always in the details. But to categorically decide that warranties are good or bad is flawed logic. The correct answer, in my opinion, is to independently analyze any purchase or decision and use your best judgment.

  7. Harry Sit says

    @Arvind – I don’t know the answer to your question. That must depend on the specific program rules.

  8. The Incidental Economist says

    @TFB – I can see your point of view. (I’m not arguing with you just providing another point of view.)

    But I have another. A warranty is fundamentally different than most products other than an insurance product. You’re transferring risk. Most other products don’t involve risk transfer. Since the seller typically knows the distribution of risk better than the buyer the seller makes money on average. The premium, on average, is above the expected value of the coverage.

    Of course you may know your risk better than the seller. So you can win with insurance. But, on average you won’t. On average you’re better off self-insuring.

    Yet some cannot self insure for some risks (my prior comment).

    Some insurance is purchased with the hope you never need it. That’s not true of most other consumer goods. Sounds like a riddle: what’s something you buy but don’t want to use? {Home, life, health, auto, disability, …} insurance.

  9. c.Kuehn says

    I just bought a new Volkswagen EOS.I have until Monday June 21 to decide weather or not to buy one of the Volkswagen extended vehicle protection with a 20% savings off of the regular dealer price. After viewing the posted comments I’m really not sure what to do now. I do have the 1,000 mi or 3 yr covered because it is new. So even with the 20% savings you think I should still wait and buy a plan later?

  10. Harry Sit says

    I would go by what I wrote in this post. Take your time to know your car better. Make a decision at the two-and-half-year mark. Shop around if you still want the extended warranty then. 20% off is not that much of a discount.

  11. td says

    I work at a dealership. I have been in the finance office for about eight years. been in the auto industry for about 26 years. Ive been all levels of the industry and founf that the finance office is the most enjoyable for me.

    Buying an extended warranty is a tough choice. f you are dealing with a reputable dealer they will only offer warranties that have cash refund. All manufacturer warranties are refundable. Wether it is prorated or not is in the provisions. All VW warranties have a full price refund available.

    When I am selling warranties I always try to find out how many years you are planning on owning this car as well as how many miles you plan on driving per year. This way the warranty coverage is right for you and you are not spending to much for coverages that you are never going t use.

    Also, when buying a car new vehicle warranties are less expensive than two and a half years later. The amount of money you can save buy purchasing the warranty at the time of the sale could make up the differencr of the prorated cancelation charge if you decide you do not need the warranty down the road.

    The best thing to do is have the dealer show you(not tell you) the cost of a two and a half year old vhicle warranty. Tgis may hep you determine the right way to go.

    I alsp know that alot of third party warranties are offered. Buyer beware. If it is a used car dealer DO NOT BUY THEM. New car franchise dealers are held to certain level of expectations by the manufacturer in order to maintain the franchises. majority of the larger dealers use Zurich(Universal Underwriters), Fidelity Warranty Services(JM&A Marketing) and Southwest Dealer Services. Those companies are great because the dealeractually owns a percent of the claim process as well as the profits generated by the sale of the coverage. Because they own them they are more likely to cover questionable claims because the state insurance commision office enforces the policies ver stricty.

    Used car dealers do not have these restriction by the franchises so they operate alot more loosley.

    Third party warranties can often be alot less expensive and sometimes even cover more than than the manufacturer warranty does. Make sure the finance office explains them very clearly to you before making your decision.


  12. Tony says

    Listen, I just purchased a new Dodge vehicle. The dealer offered me a 7 year 85,000 mile service contract. he states the if I do not make a claim in the life of the contract, I get every cent back! However, the chances of not making a claim are small, which is why they offer this deal. If the check engine light goes on[and it will happen more than a few times], they will find an oxygen sensor or something else to be repaired, for $350.00, and is covered by the warranty, but say goodbye to any money coming back to you. My prior car, a Nissan Altima, had an extended service contract, and i had to replace the fuel pump twice, which was coverd by the contract. However, each occurrence would have cost about $500 to fix for a total of $1000. I spent $2000 for the extended service, which means they still came out ahead.

  13. Robert Fuller says

    I purchased a Chevy Tahoe 7 years ago and bought the extended warranty on the basis that if the AC, the 4WD or electronics needed to be repaired/replaced it would easily cover the cost of the warranty. The dealer offered 50% back if I never used warranty. So if for example I had a $250 repair I paid for it myself. I had to request the refund within 30 days of the extended warranty expiring which I did, and received a check for $850.00 I’m sure some people forget and miss out on the refund.

    I’m now in the position of buying a new car, and the dealer/brand doesn’t offer the same deal, so I’m very reluctant to take on the warranty.

  14. Gus says

    Jim Ellis Mazda of Marietta, Georgia tried to sell me Fidelity Warranty which I am now learning is practically worthless. Why would a reputable dealership sell such a worthless policy. I think this is the worst thing they could do and ruin their reputation. It makes no sense to me in this day in age when everyone is reviewing these things online and sharing information with one another. I don’t trust a dealership that will treat its customers this way and try to sell them garbage.

  15. oti says

    I bought a used car late last year for about 18 grand,including $1,800.00for 3 years unlimited miles extended warranty.after reading some reports on consumer report to b specific,i realize that if the car needs some repairs i will take my chances and pay out of my pockets.i did cancel it thinking was going to get back 15 hundred or maybe 14…..only $1,116.for less than 6 months they are keeping nearly 700.00 of my hard earned greens,to me it sounds like a rip off.i will file a complaint with the BBB,they got me but i am not going down without a good fight.first time and for sure d your eyes before buying this bull****.it not worth it,only d dealer wins.

  16. aldrin roget says

    hello i’ve been in the car business for over 15 years in the “us” and i’ve done alot sales ,f&i sales manager i even owned a used car lot fora while i now live in the caribean and there is no warranties for new or used of any kind ,i’ve spoken to several of my warranty contact an no one offers a program for here so i would like to start my own there are a couple of large insurance co. who are able to under writer the polices what type of information should i be looking for to sell the idea to the under writers any help will be great a total of 25k cars are sold a year 15k new 10k used mainly used cars bought from japan thanks

  17. Joseph G says

    Mose experts agree that extended warranty is most often a waste of money especially if purchased with the car so you are paying interest on top of the cost of the plan. Get a good VIN check of the car prior to purchasing. Even on the off chance of a major repair it will more often than not cost less than the $3500-6000 extended warranty. Many extended warranty companies have very bad reviews.

  18. Kevin M says

    5 Years ago I was talked into buying an extended warrenty on my new van. Didn’t want to but felt pressured to get it. Powertrain warrenty on car which is free was for 70000 miles, 3 year 36K for everything else. Extremely reliable car by all reviews everywhere. Had a problem last week with 85K on Van. Transmission lost second gear, now I need a new factory transmission, cost to me $0, Warrenty cost $1100 (dealer started at $1800), replacement cost without warrenty $3000+, best decision I ever made as it worked out. (thats other than marriage honey).

    Extended warrenties are like insurance just as you say. Eveything with insurance is a gamble and you hope you make out. Just as my house fire 35 years owning a house never a claim, 1 small kitchen fire worth every penny.

    Its a roll of the dice sometimes you win sometimes you loose but don’t rule them out. Insurance and warrenty companies do pay out they do not keep it all.

  19. Josh Ya says

    You are the exception. In most cases (over 50%) extended warranties are not worth buying. Imagine had you not purchased it and not had a problem. That money would be in your pocket.

  20. Sreeni says

    Great insight…Thanks for the article…I wish i had read this article few years back when I was shopping for a car..I am sure i would have saved a couple of hundreds..

  21. Sally Knecht says

    I just bought a 2013 Mazda MX-5 and they were pushing hard to sell me an extended warranty for $1,185.00 to extend it for a full 10 years. Is this worth it??

  22. Brad C. says

    I thought I would add this for what it’s worth….I live in Des Moines, IA and actually drove 350 miles to purchase my 2010 Chevy Traverse in Joplin, MO in December 2011. I had never owned a vehicle worthy of an aftermarket warranty until then, so I had never had one. My wife on the other hand, her grandfather always preached that they were ‘mandatory’ on any vehicle purchased by any of his family members and he swore by them. He owned an auto mechanic shop for years, so I’m guessing he had some experience with them. So, needless to say, I had no choice in the matter as my wife said we would be buying one. Anyways, When we bought the vehicle used from Roper GMC/Buick in Joplin, the factory Bumper to Bumper had expired already since it had 42k miles on it. We asked the finance guy about an extended warranty. He said that he typically recommends to out-of-town customers that they purchase a GM warranty thru their local dealership where they would most likely have the vehicle serviced. However, we didn’t have a couple thousand dollars lying around and we wanted to be able to include the amount in our payments, so it wasn’t going to be possible for us to buy one after our loan was filed. Therefore, he said he had an aftermarket warranty through Zurich that he could present to us. He stated it was honored at any ASE certified shop anywhere and that he had been given good feedback from others he had sold it to. The warranty was their complete comprehensive bumper to bumper (minus a list of exclusions) service contract and had a $100 deductible. We ended up purchasing it for around $1700 and it would cover us for 3 years or up to 75k miles. Well, Today I got to test the warranty out. The front left strut on the Traverse has leaked oil for a long time and i finally took it in because I could tell the strut was toast. And there was a little play in the steering. Also, the driver’s side seat belt latch never makes the sensor connection, so the dash always says the belt isn’t on. And recently the wiper fluid sensor went out and is stating that the fluid is low when it is actually full. I took it into my local dealership this morning. The service guy I talked to couldn’t give me any idea of what this was going to cost me because he wasn’t familiar with Zurich and said that they usually can’t call them to seek coverage until after they have diagnosed the problems. So, needless to say, I was pretty much sh*tting bricks all morning waiting for his call, hoping for good news regarding the coverage. He finally called and said that he had the vehicle up on the rack and the strut was definitely bad, and so was the rack and pinion. Also, the front engine cover is leaking. He said, the engine cover falls under my power train warranty, so that is good to go. But the even better news is that he spoke to Zurich and they are going to cover everything else including the new seat belt latch and washer sensor. And since it is going to be a couple of days work, they are going to supply me with a rental also. So, I couldn’t be happier right now with our decision to purchase the service contract with Zurich. Please note…..Their exclusion list did state Shock Absorbers…….However they did cover Struts.

  23. Tom M says

    I have never owned a new vehicle. The last vehicle I purchased was a two year old buick enclave. I needed an eight passenger vehicle that would actually fit in my garage. Anyway, I purchased the car as a certified vehicle from a local Chevy dealer. I never buy extended warranties on anything, but at the time of the purchase a little voice told me to do so as this was the most expensive vehicle I had ever purchased. I got the Zurich bumper-to-bumper warranty that covered the car for 72 months past it’s in-service date. In my case it was the best purchase I ever made. To date, Zurich has put nearly $10,000 into this vehicle. Leaking timing chain housing, bad water pump, bad idler arms, leaking rear transfer case seal, leaking sunroof and the granddaddy of them all…new transmission all before it hit 80,000 miles. I realize that my case may be very atypical. However, Zurich never denied one repair. I took my vehicle to the same dealer from which I purchased for all of the service. I look at it as buying insurance, you hope you never need it, but when you do, boy are you glad you have it.

    P.S. Don’t ever buy a 2008 Buick Enclave

  24. Dave G says

    Great Insights on Service Contracts!

    I am a Finance & Insurance Manager at a Dealership in Vermont. I completely agree that buying a service contract (extended warranty) is a big decision! I hear a lot of people talking about “self insuring” or do the wait and see thing.

    Remember, it is very true that the cost of a service contract is ALWAYS less when purchased when the vehicle is new. Also, the amount of coverage is almost always more when the vehicle is new.

    For many of the people I work with here, budget is an extremely important part of their lives. Putting away an extra 1800 to 2000 is not always an option with the cost of living always on the rise.

    Even though you do pay interest on a Service Contract when you finance it with the car, long term finance will have you paying a monthly payment for years after the factory warranty ends. This means that IF a problem does occur, you will be paying a monthly payment AND your repair costs. For those with a fixed budget, that can spell disaster (especially if the vehicle is relied on to get them to work to keep the money coming in for the payment).

    You have health insurance because the cost of medical care is extremely expensive, and yet you hope to never use it. You have collision and comprehensive coverage for your car because of the cost of repairs is high and yet you hope to never use it.

    I have never had someone tell me they never used their car insurance so they feel ripped off by the insurance company.

    Also remember….there are many levels of coverage for vehicles. You should never buy a contract that itemizes your covered parts. These contracts will only cover exactly what they list. Make sure you buy Exclusionary coverage (All components covered except exclusion list…usually wear items). Read the list of excluded parts.

    Keep dealers honest by asking questions and requesting written information on the contract you are discussing.

    I also believe in loyalty. If your buying your car and expect to service your vehicle at the same place, buy the contract from them. Your loyalty will always be rewarded (and if its not…never buy a car there again). You should always feel free to negotiate the price of a contract as well. Tell them what you feel comfortable paying for the protections. They will let you know if they can do that or not (any profit is better than no profit) and if they can’t then most will tell you what they can do.

    In the end….NEVER blow off the Service Contract. Make your decision based on your needs and budget, not what the “Experts” tell you…Most of them make more money that any of us that are actually considering the purchase!

  25. tulio cosma says

    I bought a car (Nissan sentra 2009) in octuber 2012 from major wolrd ny and we put service contract from Zurich ($2,500) at the same time we bought the car, but we as stupid didn’t anything about this things. the service contract says premium for 36 month or 60000 miles, but the paper doesn’t say what covers what not, I have never used this service, I only make oil change normally pep boys, the car is running normally but needs tires, I buy 1 used tires when I need, I changed rotors and padd brakes on major wolrd but they charged me $150, I would like to now information about my coverage, but I would like to know if I can cancel this coverage after almost 2 yrs

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