How Extended Warranties Work

June 23, 2010

Extended warranties are the automotive version of the hedge bet. You pay money up front so that if you experience some car failure down the road you won’t have to jeopardize your child’s college fund to replace the transmission in that 2007 Ford Explorer that you’re driving. That’s reasonable except that so much of the process of selecting a plan is either done under duress or with a lack of good information.

There’s something about a dealer’s showroom that is not conducive to making a rational decision about the future repair of your car. The idea of considering the breakdown of your new vehicle while in the midst of purchasing it seems counterintuitive. The dealers like it that way because the service contracts (they are not warranties) are an alternate profit stream that complements the car sale. So since you are in the grasp of their F&I guy why not throw the $1,500 service policy into the mix.

Automobile service contracts or vehicle extended warranties have two layers of corporate boloney to cut through before an informed decision can be made. There is a distinction between the company whose name you will see in the ads and the administrator that will be responsible for processing your claims and paying for the repairs. You will need to check out both of these entities. The sales arm of the operation is actually a broker who acquires the customers and then passes off their contracts to the administrator. Sounds a little like the bundling of home loans doesn’t it?

The contract itself outlines everything that is covered, the amount of the deductible, and any exclusion that might apply. If there was ever a situation where the expression, “You get what you pay for” applies it is the quicksand that is an extended warranty. If your selection of a warranty company has passed the sniff test, apply the same standard to the contract itself. This phase of the review is all about what you want the policy to do. Make sure the agreement fulfills your wishes.

Also know the period that the policy covers especially if you’re purchasing it in conjunction with a new car. Since you have the new car warranty running for at least 36 months, you wouldn’t want the extended warranty running concurrently. If your new car warranty is for 10 years, you might not even need a service policy.

 On the receiving end the process is pretty clear cut. You identify a problem with the car. You take it to an auto repair facility that is either spelled out in the policy or, if permitted, to the shop of your choice. The shop prepares an estimate and calls the administrator for approval. At this time, the administrator decides whether the repair is covered and there is either an audible sigh of relief or a lot of wailing and gnashing of teeth. If approved, you pay the deductible and take the car home if denied you pay the entire bill and take the car home.

The tipping point of whether this works out for you lies in the policy’s ability to meet your needs which will probably lie somewhere between keeping your vehicle functionally like new or just wanting to avoid a catastrophic loss. 

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