When the new car dealer asks if you want an extended warranty, please say no.
It's a little hard to know where to start to describe why the timing just doesn’t make sense, but I’ll try.
It is important to know that these are not extended warranties, since the only company that can extend your new car’s guarantee is the company that manufactured it. These agreements are service contracts issued by one company and usually are administered by another. They agree in advance to repair certain car components while others are not covered. Usually co-pays and deductibles apply, and sometimes the issuing company dictates where the vehicle can be repaired.
But why doesn’t it make sense to back up your new car investment with an “insurance policy” of sorts? First, you already have a back-up plan. It's called the new car warranty, and it lasts anywhere from 36 months to 10 years. The contract you buy will run concurrently with the new car warranty, which means you will have overlapping coverage. Since you can’t collect twice, it's a total waste of money during that period.
Second, if you are financing your new car purchase and the price of the service contract is included in the unpaid balance, you are financing it--which means you are paying interest on the price of the service contract. And remember you can’t use the coverage for a minimum of three years.
Next, the initial period is obviously the time when you are least likely to need any auto repairs anyway. The new car warranty is in place should the need arise. The fact that car dealers sell any of these contracts under these circumstances is testimony in itself to the degree of duress that some car buyers find themselves in when closing a deal on a new car.
Consider the multitude of scenarios that could occur before that three-year period that would mark the first time you could use your coverage. A total loss accident, a decision to trade the vehicle and the availability of a company car are some that come to mind.
Add to this the possibility that the service contract may not be refundable and certainly is not transferable to another vehicle, and you can see the case for not buying a service contract on a new vehicle.
An approach that may be more cost-effective is to wait until the car is more seasoned, and you get a sense of your long-term plans for the car. By that time the warranty is out of force, you have a feel for the vehicle’s reliability and you will not be subject to the pressure that the closing process on a new car purchase entails.