Learn about the best-kept secrets of the auto extended warranty business.

MYTH - You can only buy an extended warranty from the dealer who sold you the car.

Most car dealers are middlemen who make their highest commissions on the financing and extended warranties they sell. They are going to want you to purchase your warranty from them when you buy your car, so it can be included with your financing. Finance charges can increase the overall warranty cost by hundreds, or even thousands of dollars. You should try to buy your warranty direct from the source, if you can.

FACT - You have choices in buying an extended warranty.

MYTH - All extended warranties are basically the same; I should just buy the cheapest coverage.

Without the knowledge of how an extended warranty actually works, price is the only thing one can base their decision on. You should insist on reviewing the actual warranty contract before you purchase.

Buying an automobile extended warranty is all about transferring your risk of costly repairs and having your claims paid. Low prices may look good up front but they are often coupled with low levels of service and many restrictive contract clauses which will lead to many out of pocket costs for you on each claim.

Here are a few contract clauses you should be leery of:

  • At the sole discretion of the Administrator

  • Parts may be used or recycled

  • You must maintain your vehicle according to the severe requirements of your manufacturer (that will double your maintenance costs)

  • Any covered part that has not failed, this includes seepage of seals and gaskets.

  • The gradual reduction in operating performance is not covered.

FACT - A reputable warranty company will allow you to review the warranty contract before you buy.

MYTH - If I buy the extended warranty before the manufacturers warranty expires, I will have double coverage on my vehicle.

A common misconception is that by waiting to purchase extended warranty coverage, you will get coverage for a longer time. Much like life insurance, costs rise as we age; the cost for a car warranty will rise as the vehicle ages and accrues mileage. You will be offered the longest terms and the lowest rates for newer vehicles with lower mileage.

Warranty companies understand that you may have a warranty from the manufacturer. Their coverage is simply an extension of that, not double coverage. The manufacturer's warranty has been factored into your price quote. The more factory warranty you have remaining, the lower the cost and greater the length of the warranty extension. In other words, you are paying for tomorrow's coverage at today's rates. In addition, benefits like roadside assistance are available to you during the manufacturer warranty period.

FACT - The newer your vehicle, the lower the rates for extended coverage.

MYTH - You must purchase an extended warranty in order to qualify for dealer financing.

It does not make any sense that a person would be required to increase the amount they are financing by adding an extended warranty, in order to obtain financing. Financing is approved or denied based upon your credit, and nothing else. By including the extended warranty in your car purchase, you will be stuck paying additional interest. There are several companies that now offer interest free payment plans for their warranties.

FACT - You do not need to include an extended warranty or other expensive dealer add-on to qualify for financing.

MYTH - A "mechanical breakdown" warranty offers the same coverage as a "wear and tear" warranty.

Some service contracts exclude repairs needed due to "wear and tear." However, a large number of car repairs are needed because a part wears out from a long period of use or improper maintenance, not because it was poorly built.

The more miles on a car when a repair becomes necessary, the more likely it is that the repair will be needed because a part wore out, rather than because the part broke due to poor manufacturing. Again, some service contracts do not cover parts that wear out.

Most service contracts and policies define "mechanical breakdown" as a defect in parts and workmanship as supplied by the manufacturer, or a defect that makes the part unable to perform the function for which it was designed. Service contracts that exclude wear and tear will not cover repairs needed because a part's performance has gradually deteriorated because of normal wear and tear, unless a mechanical breakdown has occurred.

Before buying a service contract, you should carefully review what is covered and not covered to see whether wear and tear claims are excluded from coverage. If they are, you might want to consider buying a service contract that does not exclude wear and tear claims. That way, if it is not clear whether a repair is needed due to a manufacturing defect or simple wear and tear, it is more likely that the service contract company will pay for the repair. It is a mistake to assume that a repair agreement will cover every repair your car may need.

FACT - A wear and tear warranty provides much greater protection that one that solely covers mechanical breakdowns.

MYTH - As long as I have an extended warranty, I don't need to worry about my car.

Cars still need proper maintenance, as outlined in your vehicle's owners manual. Be sure to keep accurate maintenance records and receipts. To neglect this responsibility to your car may not only jeopardize your claims getting paid, but will also put your investment at

FACT - All extended warranties require that you properly maintain your vehicle and perform the manufacturer's recommended maintenance.