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Car warranty no guarantee
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November 16, 1998: 10:01 a.m. ET
Extended warranties are insurance but won't save you from all repair bills
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NEW YORK (CNNfn) - It's a contradiction. The car dealer assures you you've just bought a great car, then urges you to buy an extended warranty for when it breaks down.
And as someone who's been hit with big auto repair bills in the past, you think it might not be a bad idea to protect yourself from those costs. It doesn't help that the car dealer is insisting it's the right choice.
Extended warranties, also known as auto service contracts, are neither a rip-offs nor necessities. The truth is somewhere in between. Unfortunately, many new car buyers don't have all the information they need to make an informed choice on whether to buy one.
Even if you are informed, you can't predict you'll ever get your money's worth out of an extended warranty, according to Curtis Ward, owner of Ward's Automobile Consulting Group in New York City.
"It's a roll of the dice," said Ward.
Know your limitations
As with many other purchases, the burden of finding out what is -- and what isn't -- included in any kind of warranty falls on the consumer.
You can't count on the car dealer to offer up the information you need, said Ward. "It's not the salesman's job to point out the deficiencies in a warranty."
Auto dealers aren't necessarily pushing you to sign an extended warranty because they care about whether you pay for repairs.
Car dealers make much of their money on "back end" costs. These costs include financing, insurance and extended warranties. Often, they'll give a little on the purchase price in order to entice you with these higher-profit charges.
On top of the initial profit, dealers can also make money when you go in for repairs because many extended warranties require you to go either to the dealer's repair center or an auto shop specified by the dealer.
Even if the salesperson doesn't offer you up a wealth of information about the available extended warranties, don't let them off the hook, advised Michael Morrissey, spokesman for the National Automobile Dealers Association.
"If you don't know what you're buying, get the dealer to explain it to you," he said.
New cars come with an initial warranty. This is usually known as a manufacturer's warranty, or a limited warranty.
Typically, the manufacturer's warranty lasts 3 years or 36,000 miles, whichever comes first. They often guarantee your car's engine and drive train are free from defects and cover the costs of repair or replacements.
One of the reasons automobile dealers can sell extended warranties is under most circumstances, your car's drive train won't give out during the first three years.
Even a trend toward more competitive limited warranties hasn't helped the car buyer much. While some car makers are extending the length of their limited warranties up to 70,000 miles, the covered areas are still those that are least likely to break down.
Warranty variety
All of this may be enough to convince you that you need the security of an extended warranty. However, even Morrissey, a representative of an auto dealers' trade group can't give you an across-the-board endorsement.
"Extended warranties are as varied as the dealers themselves," he said. This makes it even more imperative you understand every letter of the contract.
These warranties vary because there are a variety of firms offering them. If you buy a Miata from a Mazda dealer, the limited warranty will come from Mazda.
However, the extended warranty can come through some third party that has no ties to Mazda whatsoever. These independent companies are known as administrators.
Administrators are something like claims adjusters in the insurance industry. If you need a repair, they will decide whether it is covered by your extended warranty or not.
Many purchasers of extended warranties don't find this out until too late, said Ward.
"After the manufacturers' warranty runs out, (consumers) will have a problem," said Ward. "They'll say they've got an extended warranty and the first thing the repair shop will ask you is 'With who?'
"A lot of the time people don't even know."
For this reason, it is important to make sure the administrator of your extended warranty isn't going anywhere soon.
Learn about the reputation of the company and find out from your Department of Motor Vehicles who fulfills the contract if the administrator goes out of business. Sometimes it's the dealer, but state laws vary on this.
Obviously, you'll also want to see what's covered under the extended warranty. Often, the coverage is more extensive than with the limited warranty. But don't expect to never pay a repair bill again.
Many warranties require you to pay a deductible every time your car is serviced. Some make you pay one charge per visit for repairs, even if they're all for the same problem. Others require one for each unrelated repair.
Car dealers aren't selling you an extended warranty because they know it will save you from paying them either, according to Ward.
"Usually, they don't cover alternators, starters, water pumps, valves, the high ticket items that tend to have problems," he said.
"People think they cover everything, including the power windows motor. They don't."
Extended warranties also require diligence on your part. When you bring your car in for what you consider covered repairs, you'll be required to show you have given your car the proper routine maintenance.
This will mean bringing receipts to show you've changed the oil regularly, replaced the spark plugs...etc. If you can't show that, the contract can be voided.
Extended warranties aren't traps. In fact, there are ways to save money when you purchase one.
First, the price you are quoted at a dealer for such a warranty isn't firm. In the same way you haggle over the price of a car, you can haggle over the price of the extended warranty.
Working in your favor is if they don't give you the price you want, you can walk away. You don't have to buy your warranty from your car dealer.
In fact, the number of companies offering extended warranties keeps on growing. Even insurers like GEICO are offering versions of insurance covering repairs.
Not to be outdone, the online community is getting into the act as well. Companies such as Warranty Gold are offering extended warranties with prices that can be significantly lower than dealer warranties. You can get a free quote online.
Extended warranties can even have benefits when you no longer want to keep your car, said Morrissey, since you can transfer the warranty when you sell it.
"If you can transfer the warranty with a nominal fee, say $15 to $25, you can say in a classified ad that the extended warranty still has 30,000 miles on it," he said. "It can be a big selling point." 
-- by staff writer Randall J. Schultz
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