All About Auto Warranties
Well hello! I’ve been trying to reach you about your Car Warranty!
There is NOTHING more cringe worthy than picking up your phone and hearing the all too familiar spam call!
As a CERTIFIED FINANCIAL PLANNER™, I always discuss good, better, and best financial practices with my clients, friends, and family. When it comes to your finances, investments, and whatever else to do with your money, there are several possible routes to take! You could take a route that's primarily geared towards aggressively investing and building wealth for yourself sometime in the future. You could also make a plan that's more centered around savings. However, some of the most effective financial strategies will have wax and wane that takes and borrows elements from all different kinds of plans. Financial planners are similar in that respect - the best type of financial planner, advisor, or coach is one that is able to pull and use all sorts of financial strategies.
I'd like to consider myself a good (or even great ;D) financial planner who is able to draw from all sorts of financial plans and bring them together into one overarching cohesive strategy. I talk with my clients about all kinds of traditional (as well as less conventional) financial, investing, and saving strategies! As any good financial planner knows - it's much easier to waste money than it is to earn it. That leads me to our topic of the day…Auto Warranties!
Starting with the Basics – What's an Auto Warranty?
Auto warranties are definitely not what most people would think of first when talking about financial planning or building a financial plan. However, anything that has to do with cars is almost assuredly going to cost quite a bit of money. And vehicles are generally one of the most expensive investments we make in our personal lives, right behind our homes and college. So why wouldn't financial planners talk about auto warranties? Especially since they're something that can theoretically save you thousands of dollars throughout your car's lifetime.
While most of us are aware of what a car warranty is, I'm sure some out there are less familiar. Most of the time, when you purchase a car, truck, SUV, or other new or used from a dealership, you'll have the option to pay for a warranty, or extended. This warranty will have a list of parts that it "covers" and a criteria that qualify broken pieces. In other words, warranties come with a list of what they'll be willing to fix if the parts break in specific ways. This isn't dissimilar to how phone manufacturers will repair your phone as long as you aren't the one who damages it.
Car Warranties VS. Car Insurance
When talking about car warranties, they're often confused with car insurance. I'm not necessarily sure why this is other than the fact that both are "add-ons" to your car's overall cost, and both include the word vehicle in their name. However, the two are very different. A car warranty is something that you either get or can pay for when purchasing a car that covers specific parts of a vehicle should they stop working due to mechanical failure or manufacturing deficiencies. Car insurance is something you purchase from a third party that (in simplified terms) covers costs and damages associated more with user error.
Suppose you were driving down the road and suddenly your engine stopped running, and it had nothing to do with you. You take it to a mechanic, and the mechanic tells you that you have a defective engine. This is an example of something that a car warranty may cover. Now suppose you're riding down the road. Out of nowhere, another car hits you from behind (luckily, no one was hurt) - this is an example of something you would contact your car insurance about.
Another notable difference between car insurance and a car warranty is how legally necessary they are. Almost everywhere requires the owner/operator of a vehicle to insure it before they're legally allowed to drive it on a public road. This ensures the financial safety of the driver and everyone around them while driving. Car warranties, on the other hand, aren't required by law. In fact, most cars driving around you at any given time likely don't have an active warranty.
Factory Car Warranties
Most car or automobile warranties will be in the form of a factory warranty. These are warranties that come with a new vehicle that's purchased from a dealership. So if you buy a new car, you likely have a factory warranty (likely at no extra cost) whether you know it or not. However, don't go jumping and screaming just yet - these tend to be the most narrow-scoped warranties. Manufacturer warranties are really aimed at just fixing problems that may arise due to faulty manufacturing. In other words, if there's a user-error problem or something goes wrong because of age or use - you're likely on your own.
Manufacturer warranties also have a shelf-life defined in both years and miles. So, for example, your factory car warranty may run out at 36,000 miles or three years after purchase - whichever comes first. But, again, this all comes back to the fact that manufacturers are really trying to use these warranties specifically to repair issues that have to do with their processes.
There are several types of factory warranties. Let's talk about two of the most common: bumper-to-bumper and powertrain.
Bumper-to-Bumper factory car warranties cover (almost) everything, you guessed it, between the front and back bumper. These are the gold standard of factory warranties. They're also called vehicle service contracts and are generally free with new cars. These factory warranties typically last between three and five years and cover the most extensive variety of components in a vehicle. These inclusions and exclusions of bumper-to-bumper warranties vary from manufacturer to manufacturer; however, typically, you wouldn't expect things like windshields, tires/wheels, upholstery, or shocks to be covered. Bumper-to-bumper warranties can also be purchased for used cars from a third party; however, these warranties require much more caution.
Powertrain warranties, unlike bumper-to-bumper warranties, only cover the powertrain components. The definition of powertrain components may vary from manufacturer to manufacturer. Still, these are generally things like the engine, transmission, and drive train. In other words, powertrain warranties tend to cover components that lend themselves to the core function of the vehicle, nothing more and nothing less. Another notable difference between bumper-to-bumper and powertrain warranties is that while bumper-to-bumper warranties include everything except what they list as exclusions, powertrain warranties have only what is listed.
Extended Warranties come in to pick up the slack where factory warranties drop-off. Remember when we talked about how a factory warranty will usually last about 3-5 years or 30,000 miles (whichever comes first)? An extended warranty can be bought for one of two reasons: 1. To extend your car's factory warranty lifetime, or, 2. Broaden the scope of your car's factory warranty.
These are a great option if the time of your car's factory warranty has expired or if you want something covered that isn't originally covered in your factory warranty. Though many think that only third-party businesses/companies offer extended warranties, that isn't true. You can, in fact, get an extended warranty through your car's original manufacturer or dealership. Unfortunately, many also consider extended warranties to be less-than factory warranties in quality. While it's true that you have to be extra-cautious and wary when dealing with a third-party warranty business, that doesn't necessarily mean that your coverage will be horrible. With many extended warranties offered by original manufacturers and reputable third parties, the coverage will be identical or nearly identical to the original factory warranty for bumper-to-bumper and powertrain warranties.
One important thing to note about extended warranties is that they aren't ongoing. That is, similarly to how a factory bumper-to-bumper or powertrain warranty will have a lifespan of 3-5 years or 36,000 miles, an extended warranty will also have a yearly or mile-based lifespan.
Are Extended Warranties Worth it?
It's difficult to say definitively whether or not an extended car warranty is "worth it." Like so much else in finance, automobile warranties could be made perfect for the consumer if they could look into the future. If we could look into the future, we could know how high a stock price could go before we should sell it, whether it's the perfect time to buy property, or if our car's transmission will go out right after its 3-year factory warranty has expired. In other words, it's just about impossible to know whether or not you'll need to use your warranty or not which is the ultimate deciding factor of whether or not it's worth it. However, one could make the argument that as long as you have a good warranty from a trustworthy company, you're paying for peace of mind on the road.
What's Covered in a Warranty? (And What's Not)
As we've discussed, a lot can be covered in a car warranty. So the answer to this question sort of depends on which car warranty your asking about. It also varies depending on the manufacturer of the car in question. For instance, with a bumper-to-bumper factory warranty, almost every critical component of the vehicle is covered (that doesn't have to do with normal road conditions or user deterioration like tires or windshields), and with a powertrain warranty, generally speaking, all of the car's main components (engine, transmission, and drive train) are covered.
With extended warranties, this is a question that you should thoroughly review the answer to before making any final decisions about purchasing a warranty or not. If you're not a car person, and you're not really sure what you're looking at, feel free to ask for a copy of the terms of the warranty that you can take to a friend, family member, or even a mechanic to help you look over what will and won't be covered by your warranty.
While it's challenging to lay out what might be included in a warranty, it's much easier to list what's most likely not included. Most of the time, what won't be included in a contract (most of the time) are things that are broken, damaged, or worn because of normal driving conditions or user error. Your car's tires, wheels, windshield, windows, windshield wipers, paint-job, corrosion, lights, upholstery, and interior are some easy examples of what generally won't be covered under your car's factory or extended warranty.
How MUCH is a Car Warranty?
Car warranties vary in cost depending on the company offering them, their quality, their coverage, and various other factors. For starters, as we've previously discussed, factory warranties are free. These are warranties that are offered from the dealership or manufacturer with the purchase of a new car. On the other hand, extended warranties can be expected to start out at somewhere between $1,000 and $4,000 (and the sky is the limit). While it can be tempting to go the route of the cheapest option, an automobile warranty isn't necessarily where you want to skimp. While it isn't always the case - you may end up dealing with less-than-reputable businesses that offer incredibly cheap rates. For this reason, I'd suggest focusing much more on the coverage of a warranty policy and then considering the price.
When Should You Purchase an Extended Warranty?
It should not be a surprise that consumer studies have shown that we like our purchases to be reliable. As a result many car buyers like the idea that their extended warranty will keep their new purchase on the road. The question becomes when should you purchase your warranty?
As I mentioned about warranties can vary in price depending on coverage and the carrier. If you are in the market for a new car, go a little further and look into extended warranties before you step foot on the car lot. There is a good chance that the dealership will have their own extended warranty to sell. Know your options and pricing.
It’s best to purchase a policy while your manufacturer's warranty is still in place so there is not a lapse of coverage. Look into the terms of the extended warranty you are purchasing to determine if your extended warranty starts right away or if it begins after your manufacturer’s warranty expires. Having extended coverage is nice, but being there is not a lot of value in being having double coverage. This means that you can wait until your warranty has a limited term left before purchasing your policy. In other words, if you purchase an extended warranty that covers 5 years or 50,000 miles, you want to make sure it’s not covering the same period that is being covered for free.
I like to suggest you also purchase an extended warranty as a separate transaction from the new car purchase. This way you are not financing your extended warranty, and adding on unnecessary interest.
How to Avoid Warranty Scams
When talking about automobile warranties, it's almost impossible not to mention that there are plenty of automobile warranty scams out there. Seriously, from scam-callers trying to steal your information using automobile warranties as an "in" to sketchy businesses offering shoddy third-party extended warranties. What's important to realize is that these scams are bursting at the seams. They're some of the oldest tricks in the book, and you must be extra vigilant when purchasing an automobile warranty. If you're not sure about a company, turn and walk away. If you've heard negative things about a third-party extended car warranty company, don't even start dealing with them. Also, be sure to never give your personal information out over the phone to someone who calls you.
Where You Can Get a Warranty.
Warranties often come with your vehicle from the dealership or manufacturer. The dealership you're buying from will inform you of your vehicle's factory warranty when purchasing a car. They'll also likely try to upsell or cross-sell you an extended warranty. However, if they didn't, or you refused and are now second-thinking your decision - you can always revisit the dealership and ask about purchasing a warranty after the fact. You may also pay a visit to your financial planner or financial coach, who will likely be able to give you great suggestions about warranty options.
Are you interested in learning more about the factory and extended automobile warranties? If you'd like help or advice about factory or extended warranty automobile policies, please call or email to schedule an appointment with me. I'll work with you to create a financial plan that's optimized for you.
Until next time...this is Melissa Making Cents!
Melissa Anne Cox, CERTIFIED FINANCIAL PLANNER™, is also a College Planning and Student Loan Advisor and Financial Coach in Dallas, Texas.