Extended vehicle warranties

Extended vehicle warranties – yea or nay?

Lots of our clients have had questions for us about extended vehicle warranties, also called service contracts.  We have quite a bit of experience with them and the companies that sell and administer them.  I have some advice for those of you thinking about buying an extended warranty, but before I get into that, lemme share a quick story.

A few years ago, we had a client pull up to the building in a Mitsubishi that he’d recently bought from a used-car dealer.  It was clear even before the car came to a complete stop that it would probably need to have the engine replaced.  The bottom-end had a terrible knock, the kind that translates into “replace me” in English.  I checked the oil, and it was full, and it had a beautiful metallic sparkle to it – very pretty, really.  Unfortunately, the metallic loveliness was made of ground-up engine parts.

The hapless motorist told me that this was his first car, and he had wrestled with the decision of whether or not to pay for the extended warranty.  Fortunately (or so he thought), he’d agreed to pay the extra money every month for the coverage.

So, I called the chimps (sincere apologies to chimps) at the warranty company.  I knew right away that we were in for a rough ride – they wanted me to get the car’s owner to authorize couple of hours of diagnostic labor time.  I said “Huh?  This car needs an engine.  I diagnosed it almost without opening the hood!”  Didn’t matter.  “We need to know the cause of failure.”  My reply – “It’s a man-made mechanical device.”  Not good enough for the primate on the phone.  Of course, diagnostic labor wasn’t covered by the warranty.

Reluctantly, I called the poor chap with no wheels, who, just as reluctantly, agreed to pay for some labor.  The warranty nitwit wanted me to take the oil pan off and “look at the oil pump” or some such nonsense.  We went ahead and pulled the pan, knowing that we were wasting our time and our client’s money, in the hopes that it might get us closer to replacing the engine.  But no, after that, he wanted me to take some more stuff apart, at my client’s further expense.

I told this feller that clearly he and his company didn’t trust me to make one of the simplest diagnoses out there, or else he wanted me to steal my client’s money.  I told him that I’d call the car’s owner to let him know what was going on, and give him the option of towing the car to a shop that the warranty company trusted, or was willing to steal his money, or else they could just authorize an engine replacement.  Well, this had the desired effect – they immediately authorized the engine replacement, and sent me a used engine, of dubious history.  I waived the “diagnostic labor”, and the poor guy finally got to drive his car again – after paying his deductible.

This young man would have been better off putting aside the cost of the warranty, and paying for the repair out of pocket.  That would have put him about five hundred to the good, and we could have gotten him rolling about a week earlier.  If I had to guess, I’d say that the vast majority of motorists never come close to breaking even on these extended warranties.

If you’re considering buying one of these contracts, please make sure to read it carefully.  A lot of them only cover things that never break, or have onerous stipulations regarding maintenance, etcetera.  Scour the internet (soon; it’s probably just a fad) to see what other victims happy customers are saying about your specific plan and company.  One of our clients had an aftermarket (as distinguished from the manufacturer’s) warranty, and when we called to see if the repair was covered, we got a recording saying “We’re super-duper sorry, but we’ve declared bankruptcy.  You’re free to join the class-action lawsuit against us.  Good luck!” or words to that effect.

I believe that the only extended warranty to even consider is one offered and backed by your car’s manufacturer.  Do some research on the repair and reliability history of your particular make and model – you might be surprised at how trouble-free it is.  Also, don’t forget that in many cases, the dealer is marking the contract up by up to 100%.  Consider just setting the money aside – most of these types of contracts will cost you 1,500 to 2,000 dollars.  Don’t forget to factor in that they typically don’t cover “wear items” or maintenance, usually have a deductible, and often don’t cover “diagnostic labor” (see horror story above).  Another sneaky trick they often pull is hidden in the fine print – they’ll only pay some dollar amount for labor, usually just a fraction of current labor rates.  Bottom line – be careful, read the whole contract, and don’t let some salesman or F & I (finance and insurance) guy at the dealership pressure you.