If extended warranties were a good deal, they wouldn’t need to sell them

extended warranty and vehicle service contracts what you need to know cars
Digital Trends contacted several vehicle service contract companies to present their side of the story. All of them declined to respond when provided with written questions about their insurance backing, claims policies, and consumer complaint records.

If you’ve bought a used car in the last 10 years or so, you’ve heard the extended warranty pitch. Even if you bought a new car, you’ve probably received calls and letters offering to sell you a Vehicle Service Contract once the original manufacturer’s warranty expired.

Let’s cut right to the bottom line – vehicle service contracts are a bad deal for you. All of them. All the time. Don’t buy them. That’s our advice. But if you want to know why you should pass up extended warranties, keep reading.

About warranties and service contracts

All auto manufacturers offer a warranty on new cars. The exact terms of manufacturer warranties are governed by a large body of Federal and State laws that depend on where the car is sold, but a new car warranty is provided by the manufacturer to ensure that a new car will give reliable service for the covered period. Generally speaking, you won’t get less than three years or 36,000 miles, and some warranties go up to 10 years and 100,000 miles on the powertrain.

Bottom line, vehicle service contracts are a bad deal for you. Don’t buy them.

The U.S. Federal “Lemon Law” passed in 1975 mandates that warranties have to be clearly defined, and all automakers do that. It gets complicated because there are different minimum warranty periods for general materials and workmanship (the bumper-to-bumper part) than there are for the powertrain, and there are minimum warranty standards for emission control and safety devices.

What you can take away from this is that the automaker itself is promising that your car will work as designed for the stated warranty period, whether based on mileage or the number of years since you bought the car. You generally take the car to the dealer for warranty repairs, but it’s the automaker who pays to fix your car if it breaks under warranty. Some certified used cars also carry manufacturer-provided warranties.

An extended warranty or vehicle service contract is a totally different thing from a manufacturer warranty, but the people who sell them generally won’t say so to the buyers. Generally speaking, automakers and dealers don’t provide extended warranties. Extended service contracts are offered by third-party corporations with no relationship to the automaker. Dealers who sell the contracts get a share of the revenue, but you do not necessarily have to bring your car back to the dealer for covered repairs.

Extended warranties cost money

With a vehicle service contract, you’re buying insurance that promises to pay for repairs if your car breaks down during the covered period. In essence, you’re betting a lot of money that your car is going to need an expensive repair during the term of the contract. The service contract provider is betting that your car will not need a repair. In general, the contract provider is correct. With modern cars, big repairs are less common than they used to be, at least for the term and mileage that extended warranties cover.

The companies that issue these warranties have access to extensive actuarial data about the frequency of repairs to virtually every make and model of car, and that’s how they set the rates for the warranty. If a car is known to have a higher average cost of repairs, the price of the warranty is set higher to cover that cost.

Getting coverage when you need it

Here’s where things get sticky. Suppose you bought the extended warranty and then your car breaks. No problem, right? That’s why you bought the warranty. You take your car and your warranty to the mechanic and it’s all supposed to be paid for.


The sticking point is this: If the extended warranty company doesn’t pay the mechanic, you’re still on the hook for the cost of the repair, and extended warranty companies are notorious for not paying. One common tactics is claiming that the car was broken when you bought it; a “pre-existing condition” won’t be covered. Proving that the car broke during the coverage period is nearly impossible when the warranty company doesn’t want to believe you.

Another common practice is for the warranty company to file bankruptcy and go out of business after a few months, and then the owners simply form a new company and go on selling warranties. If you’re holding a warranty from the dissolved corporation, good luck getting your repair bills paid.

Do your homework

There are pages on Facebook devoted to fraud and complaints about unscrupulous service contract providers.

Not all extended warranties are scams, but enough of them are that you need to be very careful before you even consider buying a service contract. The first thing to do is find out who’s really behind the contract. Many states require an insurance company to “reinsure” or guarantee service contracts, so there’s enough money set aside to pay claims. If the warranty company is not up-front with this information, that’s a bad sign. When you get the information, contact your state’s insurance commissioner and look up the insurance company’s record as well as the record of the company issuing the service contract.

You can also check online review sites and the Better Business Bureau for complaints, but remember that bad companies use “reputation management” services to file fake positive reviews, and many online review sites buckle under legal threats and remove legitimate bad reviews. There are even pages on Facebook devoted to fraud and complaints about unscrupulous service contract providers.

You don’t have to buy the warranty

Another thing to remember is that you don’t have to buy the extended warranty. Because used car dealers often get a share of the price, they aggressively sell the contracts. It’s pure profit for them. So check to make sure an extended warranty has not been added to your bill before you agree to a bottom line price.

If a salesperson tells you that the warranty is required before you can get financing, check on that claim, too. In most cases, financing does not require a warranty, and you can get better loan rates from your local credit union anyway.

Related: Beware of auto warranty scams

In general, if you stand your ground, even the most aggressive salespeople will back down. You might have to tell them that the warranty is a deal-breaker and get ready to leave, but be firm about it. No one wants to lose a sale.

Hang up the phone

As mentioned, service contracts sold by dealers have a mixed record, but you should never, ever agree to a contract with a company that cold-calls you on the phone. These companies got your name through your state’s motor vehicles department, and they start calling when your car is 3 or 4 years old.

Most of these companies run out of boiler-room call centers in states with lax laws about bankruptcy. If you get a warranty offer over the phone, just hang up. If it arrives in the mail, throw it away. The more official-looking the offer is, the more likely it’s a scam. The worst of these companies will try to get your personal information, such as your social security number, and then sell it to identity thieves.

What you should do

There’s no doubt that big auto repair bills can be scary. That’s especially true if you have just one car and you need it to get to work and move your family around. So there are things you can do. First, if you can swing it, buy a new car instead of a used one. If that’s not possible, you’re almost always better off taking the price of the extended warranty and putting it in savings. Even the best warranty providers know that chances are good they’ll get to keep your money because your car’s not going to break.

As an alternative to including the service contract in your car loan, see about getting a credit card with a low rate, and then set it aside for auto repair bills. If your car doesn’t break, you don’t pay a thing. If your car does break, you’ll still probably be better off than if you paid for the extended service contract.

Finally, your auto insurance company likely offers some form of service contract. If your insurance company is reliable, that’s where you should buy the coverage.

If you think you’ve been scammed, contact your state’s Insurance Commissioner or Attorney General and see if they can help you. You’re probably not the only person with the same problem. The Federal Trade Commission also looks into these matters for widespread abuse.

There is near-unanimous agreement that extended automobile warranties and vehicle service contracts are a bad deal for consumers. The United States government, state governments, and consumer advocates all say that there are much better ways to plan for vehicle repairs than betting against yourself. With a little planning, you can keep more money in your pocket and still maintain your peace of mind.


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