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Extended Auto Warranty Basic Overiew

Are you buying a car? If so you may be encouraged to buy an extended auto warranty to help protect you against unexpected, costly repairs. While it may sound like a good idea, and it is indeed a good idea under the right conditions. However, don't buy anything until you understand both the terms of the extended warranty contract and who is responsible for providing the coverage.

An extended auto warranty is a promise to perform (or pay for) certain mechanical repairs or services. Sometimes called a "service contract," is not a warranty as defined by federal law.

An extended auto warranty may be arranged at any time and always costs extra; a manufacturer's warranty comes with a new car and is included in the original price. A separate and additional cost distinguishes a service contract or an extended auto warranty from a manufacturer's warranty.

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Before deciding whether or not to buy an extended auto warranty, ask the following questions:

  • Does the Extended Auto Warranty Duplicate any Warranty Coverage?

    Compare the extended auto warranty with the manufacturer's warranty before you buy. New cars come with a manufacturer's warranty, which usually offers coverage for at least three years or 36,000 miles, whichever comes first. Even used cars may come with some type of coverage. Ask the dealer if there is any warranty coverage on the used car.

    You may decide to buy a "demo" - a car that has never been sold to a retail customer, but has been driven for purposes other than test drives and therefore may have several thousand miles on it. If so, ask when the warranty coverage begins and ends. Does it date from when you purchase the car or when the car dealer first put the car into service?

  • Who Backs the Extended Auto Warranty Contract?

    Ask who performs or pays for repairs under the terms of the extended auto warranty. It may be the manufacturer, the dealer, or an independent company.

    Many extended auto warranties sold by dealers are handled by independent companies called administrators. Administrators act as claims adjusters, authorizing the payment of claims to the repair shop. If you have a dispute over whether a claim should be paid, you may have to deal with the administrator, so make sure you know who that is.

    If the administrator goes out of business, the dealership still may be obligated to perform under the contract. The reverse also may be true. If the dealer goes out of business, the administrator may be required to fulfill the terms of the contract. Whether you have recourse depends on your contract's terms and/or your state's laws so read all the fine print carefully.

    Learn about the reputation of the car dealer and the administrator. Ask for references and check them out. You can also contact your local or state Consumer Protection Office, state Department of Motor Vehicles, local Better Business Bureau, or local Automobile Dealers Association to find out if they have public information on the firms. Look for the phone numbers and addresses in your telephone directory.

    Find out how long the car dealer or administrator has been in business, and try to determine whether they have the financial resources to meet their contractual obligations. Individual car dealers or dealer associations may set aside funds or buy insurance to cover future claims. Some independent companies are insured against a sudden rush of claims.

    Find out if the extended auto warranty is underwritten by an insurance company. In some states, this is required. If the contract is backed by an insurance company, contact your State Insurance Commission to ask about the solvency of the company and whether any complaints have been filed.

  • How Much Does the Extended Auto Warranty Cost?

    Usually, the price of the extended auto warranty is based on the car's make, model, condition (new or used), coverage, and length of contract. The upfront cost can range from several hundred dollars to more than $2,000. And remember . . . if you are buying an extended auto warranty from a car dealer that dealer is marking up the price substantially.

    In addition to the initial charge, you may need to pay a deductible each time your car is serviced or repaired. Under some extended auto warranties, you pay one charge per visit for repairs no matter how many. Other warranties require a deductible for each unrelated repair.

    You also may need to pay transfer or cancellation fees if you sell your car or cancel the warranty.

  • What is covered and not covered?

    Few extended auto warranties cover all repairs. Common repairs for parts like brakes, clutches shocks, spark plugs, bulbs and so forth generally are not included in service warranties. If an item isn't listed, assume it's not covered.

    Watch out for absolute exclusions that deny coverage for any reason. For example if a covered part is damaged by a non-covered component, the claim may be denied.

    If the warranty specifies that only "mechanical breakdowns" will be covered, problems caused by "wear and tear" may be excluded.

    If the engine must be taken apart to diagnose a problem and it is discovered that non-covered parts need to be repaired or replaced, you may have to pay for the labor involved in the tear-down and re-assembling of the engine.

    You may not have full protection even for parts that are covered in the contract. Some companies use a "depreciation factor" in calculating coverage. The company may pay only partial repair or replacement costs if they consider your car's mileage.

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