Extended Warranty: Everything You Need to Know

Written by Zach Shefska

Zach Shefska is Chief Executive Officer of Your Auto Advocate. Zach co-founded Your Auto Advocate in 2019 after convincing his then retired father (sorry, dad) to join him in an attempt to make the car buying process more confidence-inspiring and consumer friendly.

November 4, 2020

As if buying a car wasn’t hard enough, purchasing add-ons like an extended warranty can be even more frustrating and irritating for car shoppers. For starters, what if I told you that the phrase “extended warranty”, is frequently used in an intentionally misleading way to profit off car buyers? We are talking about the car business, so maybe it’s easier to believe because of that, but the truth is, nine times out of ten, when someone is talking to you about an extended warranty they’re using the entirely wrong phrase.

Why then do you see commercials for extended warranties, get letters telling you that you should purchase an extended warranty, or receive phone calls telling you that your car is out of warranty and that you should buy an extended warranty RIGHT NOW? Because capitalism, that’s why.

Selling extended warranties is a lucrative business, even if in most cases it is a made up word that doesn’t actually exist. Many companies have found great success in the tactics described above (essentially fear marketing), and for better or worse, the term “extended warranty” isn’t going away anytime soon.

All that being said, we strongly suggest that you read or guide to vehicle service contracts. Most extended warranties are actually just vehicle service contracts. More on that below.

If you’re dead set on learning about extended warranties, then have no fear. We’ve taken most of our guide on vehicle service contracts and adapted it for this page. The reality is, more car buyers search for “extended warranty” than they do for “vehicle service contract” so it’s important we cover both topics (even though in most cases they are the same thing).

Without further ado, let’s dive in.

What is a car extended warranty?

So what actually is an extended warranty on a car? First you need to understand that a warranty is something that comes with the purchase or lease of a vehicle. It can be given by the manufacturer (most typically) or the car dealer, but it is an incident of the sale. Third parties cannot issue warranties for goods they did not produce or sell directly.

An extended warranty on a car, truck, or SUV that is sold by a third party is actually a vehicle service contract. An extended warranty sold by a seller (dealer), or manufacturer is an extended warranty.

The Magnuson–Moss Warranty Act of 1975 was enacted to fix problems as a result of sellers using disclaimers on warranties in an unfair or misleading manner. The unfortunate reality is that sellers are still using the term warranty in a misleading way.

Here’s a great example of this in practice. Go to PenFed Credit Union and you’ll see they sell “extended warranties”.

Extended-Warranty-from-PenFed

The moment you click on one of the sample contracts you quickly realize it is for a vehicle service contract.

Extended-Warranty-Sample-Contract

What’s the difference between the two? Quite a bit!

Warranties are express (the vehicle conforms to a written statement like this vehicle has a new transmission) or implied (warranty of merchantability or fitness for a particular purpose such as if the dealer knows the customer will use it for commuting).

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If a customer pays for extended coverage, that is a vehicle service contract. Under Magnuson Moss, if a dealer sells a vehicle service contract to the customer within 90 days of sale, the dealer cannot disclaim implied warranties. In approximately 38 states, a dealer can otherwise disclaim express and implied warranties. It does so on the Used Car Buyers Guide and in the RISC or lease agreement. 

All that being said, the term “extended warranty” is frequently used incorrectly to refer to a vehicle service contract. Extended warranties on vehicles can only be administered from the manufacturer or the dealer. For example, CarMax offers a 90 day or 4,000 mile limited warranty, and then prolonged vehicle service contracts through their third party administrators.

Warranty-and-MaxCare-Extended-Service-plans-at-CarMax

If you are purchasing a vehicle from your local dealer and they offer an extended warranty, it is up to you to do your due diligence and check who the administrator is of that warranty. Is it the dealer (unlikely)? If so, then it’s an extended warranty. Is it a third party administrator (likely), then it’s a vehicle service contract.

Why is it important that you understand the difference between an extended warranty and a vehicle service contract? Because some unscrupulous people will try and sell you an extended warranty that leads you to believe your existing warranty is “extended” thanks to the warranty you just purchased. This is not the case! Extended warranties administered through a third party (aka a vehicle service contract) do not extend your current warranty (crazy right?). Instead, they are inclusive of existing warranties on a vehicle. This means it will run in parallel with the manufacturer warranty and does not “extend” the warranty of the vehicle. It is critically important that you confirm who is actually administering the “warranty” to know if it is actually extending your coverage, or if it’s simply a vehicle service contract.

Maybe congress should pass another law that makes it illegal for companies to call themselves “Route 66 Warranty” when they really sell vehicle service contracts, but that can be for another blog post!

Should I buy an extended warranty for a car?

Okay, now that we understand what an extended warranty for a car is (and isn’t), the question is “should I buy one?” There are a few factors that go into answering this question. The TLDR is; you have to assess your risk tolerance and decide for yourself if an extended warranty is a good value or not.

One of the first things you need to understand about extended warranties for cars is that they are priced dynamically. Similar to other insurance products (think auto insurance for example), extended warranty pricing is different based on each and every vehicle identification number (VIN), and the current mileage of the car. That is to say that no two vehicles have the exact same price quote. An extended warranty on a Ford F-150 will be different then a BMW 3 series. Depending on the year, make, model, trim, and mileage, each extended warranty will be quoted from an administrator (like a Route 66 warranty, or even the manufacturer who is actually selling a legitimate extended warranty and not a vehicle service contract) with a different wholesale price.

Pricing for extended vehicle warranties is dynamic because the administrator is monetizing the risk associated with covering the costs of certain repairs to that vehicle. If you’re buying a brand new Toyota Camry that is covered by the manufacturer’s warranty, you can expect the wholesale price of a vehicle service contract to be very low. Toyota is an economy brand, and the parts needed to repair it are relatively inexpensive. Being new and under the manufacturer’s warranty means that the third party vehicle service contract most likely won’t end up with any claims against it.

Compare that to a used Mercedes-Benz E-Class sedan with 70,000 miles on it. The wholesale price for this VIN will be MUCH greater than the same extended warranty on the Camry. Why? Because the administrator is taking on a lot more financial risk. To make up for this, they sell the vehicle service contract at a much higher wholesale price.

At the end of the day, extended warranty companies are going to make their money. They know for each VIN in existence what the price is they need to offer to cover their risk and still make a profit.

What does that mean for you? It goes back to our TLDR. If you have a high risk tolerance, don’t bother with a vehicle service contract or an extended warranty. If you value the comfort of knowing things will be “covered” (although it is important to understand that there are a lot of exceptions in manufacturer, dealer, and third party contracts), then consider purchasing an extended warranty or vehicle service contract.

How much does an extended warranty cost?

Now that we understand how an extended warranty for a car is priced on the wholesale side of things, we can begin to unpack what happens on the retail side. Traditionally third party extended warranties are sold to “agents,” who then turn around and sell the products to car dealerships.

If you’re keeping up at home, that means the administrator sells the extended warranty to the agent, then the agent sells the extended warranty to the dealer, and then the dealer sells the extended warranty to you, the car buyer. I don’t know about you, but that’s a lot of hands involved in one transaction.

How much does an extended warranty cost when you go to buy one? Well, that depends on how much mark up each person in the supply chain added on to the extended warranty before it gets to you. Agents need to make their money, so they’ll mark up the extended warranty 10 to 20% when they sell it to a dealer. Dealers need to make their money, and since they don’t make it by selling cars, they try and make up for that when they sell products like extended warranties. They typically mark up extended warranties 200 to 300%.

What does that mean for you? Well, an extended warranty that may have cost the agent $500 to buy wholesale will be offered to you for more than $2,000 at the dealership.

Now if you are actually buying an extended warranty from the manufacturer, and not a vehicle service contract disguised as an extended warranty, the pricing will certainly be similar. Remember, extended warranties can only be provided by the manufacturer or the dealer. Most dealerships do not offer their own warranties, and instead they rely on third party products (like vehicle service contracts that we’ve been discussing). However most manufacturers do offer some extended warranty plans.

For example, if you purchase a certified pre-owned vehicle it will typically come with an extended warranty. This actually is an extended warranty because it is coming from the manufacturer. You may also have the opportunity to purchase an extended warranty directly from the manufacturer, again that is a real extended warranty. The cost for these warranties is different for each and every manufacturer, and it is unknown what the markup is. However, just like with third party warranties, manufacturers price their extended warranties dynamically to make sure they are charging enough to make a profit.

Extended warranty companies

Many third party companies claim to sell extended warranties. As we’ve discussed, they actually sell vehicle service contracts. Be weary of any company that markets themselves as a warranty provider when in reality they are selling vehicle service contracts. That being said, there are dozens of third party administrators you can purchase from.

Rather than give them publicity here on the Your Auto Advocate blog, we will simply refer you to this list: https://www.consumeraffairs.com/auto_warranty/

Can I buy an extended warranty directly from the manufacturer?

Yes! This is literally one of the only ways you can purchase an extended warranty. Manufacturers of goods are able to sell extended warranties on their products. You don’t even have to deal with the local car dealer to secure a manufacturer extended warranty. You can call the manufacturer directly and purchase a policy.

I want to learn more about extended warranties

I don’t blame you! It’s fascinating how this part of the automotive industry works, isn’t it? Here are the resources I used to help gain a better understanding of how the extended warranty industry operates.

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2 Comments

  1. Paul (Trusted Car Sale)

    Very insightful piece Zach & Ray thanks for sharing.

    As you pointed out, our experience also shows that consumers are terribly confused when it comes to “warranty, service contract, F & I, vehicle protection” products.

    In our view, this industry is in serious need of disruption in much the same way Dollar Shave Club (and others) re-defined the men’s shaving category. And, how “pay-by-the-mile” auto liability insurance is now disrupting the “one-size-fits-all” car insurance models of yesteryear.

    That said, the “vehicle protection” industry as currently constituted, is deeply entrenched in the existing process of auto dealers and accounts for significant portions of dealer profits, so it’s not going to be easy, nor fast to disrupt.

    But, it’s definitely worth disrupting.

    Reply
  2. John

    Thanks so much for this valuable information. When I purchased a new Honda 3 yrs ago, I recall the F&I guy high pressuring me into buying a very expensive 3rd Party Service Contract through the Honda dealership. I repeatedly declined until he got the message. After reading through some Honda forums, I discovered that I could buy an actual HondaCare Extended Warranty via 3 different Honda Dealers across the US at a substantial discount rather than through my local dealer at an inflated price. I paid $695 versus the almost $2k my dealer wanted for the same warranty. I was surprised that my dealer heavily marketed their 3rd Party Service Contract and didn’t even advertise or push HondaCare at all.
    Today, I’m shopping around for a CPO Lexus or Toyota. I was able to locate a contact person at a Toyota dealership on the east coast (I’m in Texas) who sells ToyotaCare plans at a substantial discount. She sent me a price list and it was comparable to the HondaCare deal I found 3 yrs ago. Just don’t know if she’s able to sell me an AcuraCare plan should I decide on a CPO Acura. I’ll have to ask.
    Lastly, I didn’t know one could buy directly from the Manufacturer. Just don’t know if they’ll sell it to me at the same retail price as a dealer or if they sell to individuals at substantial discounts. Thanks again for your hard work and educational info you provide to consumers.

    Reply

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