Extended warranties worth the cost?

It seems no matter what you’re shopping for these days, just about every retailer is trying to sell you some type of extended warranty. The automotive industry is no different.

After all, everyone knows a horror story or two about mechanical or electrical auto malfunctions that brought break-the-bank bills and major headaches to an unfortunate driver.

And auto retailers, like other merchandisers, depend on the profit from the sales of those plans to boost their bottom lines.

The best way to look at extended warranties is as a form of insurance and when it comes to insurance, you have to balance your exposure to risk and the costs of protection.

A key factor in this type of decision is how much money would a car owner be likely to spend on repairs after the basic warranty expires. As you might suspect, most carmakers are very hesitant to provide that type of info.

A U.S.-based trade publication, Warranty Week, tracks both the warranty expenses and accruals for a large number of firms making everything from computers to cars and reports that in 2011, the average annual expense for automotive warranty claims is about 2.2 per cent of sales revenue. On a $25,000 vehicle that works out to roughly $550 US per year. Keep in mind this is while the vehicle is within its first three years of ownership and cars tend to get more expensive to maintain as they age.

Here are a few tips when considering extended auto warranties.

1. On a new vehicle, the extended warranty starts the day you drive it off the lot. So opting for a five-year plan, only gives you coverage for two years past the basic three-year guarantee. Plans are usually available in a variety of time and mileage periods. Make sure your coverage doesn’t run out before your vehicle does.

2. The best plans are those backed by the automakers themselves. Dealerships are independent businesses and free to offer other packages. But only a manufacturer-backed warranty is guaranteed to provide hassle-free coverage when you’re dealing with another retailer out of town. If you’re not sure about the contract, don’t sign. Check out the carmaker’s website to learn how to verify the coverage you choose is theirs.

3. Verify that the price is the manufacturer’s suggested retail price (MSRP). Some retailers make mark-up protection plans beyond MSRP. Don’t be shy about asking to see an authorized price list. Call the carmaker’s consumer hotline if you want verification. These plans have a healthy mark-up so ask for a break on the price if your wallet is feeling squeezed.

4. Don’t get doused by deductibles. A plan with a $100 deductible per repair visit may leave you paying more than the warranty covers. Opting for a zero deductible is usually worth the extra cost.

5. Consider the entire cost of the plan. A $2,000 plan may sound reasonable, but if you’re financing the purchase along with the vehicle loan, interest costs can balloon that figure to a much higher amount.

6. Buy appropriate coverage. A plan that only covers powertrain items (engine and transmission internals) won’t be worth much on a power-accessory loaded set of wheels. Remember the more toys it has, the more there is to break down.

7. The biggest benefit to most extended warranties is the coverage for rental cars while yours is in the shop. Make sure the coverage starts on the first day of a breakdown and the dollar allowance will cover the cost of renting the type of vehicle you need for daily use.

Brian Turner is an automotive parts and service manager with more than 30 years experience.

Photograph by: Joe Raedle, Getty Images