When you purchase a new or pre-owned vehicle from a dealership, it’s inevitable: You’ll have to make the dreaded trip to the finance office. With the sale done and a price agreed upon, the finance office takes over to arrange your car loan/lease and other payment arrangements. It is also their job to sell you other add-ons such as protection packages, extended warranties and so on. These services can add up, to the point where it’s possible to turn a $25,000 vehicle into a $35,000 one after you’re done in the finance office!
Some of these add-ons are a total waste of money, without question. An extended warranty, though, is a little more debatable. One the one hand, they theoretically provide some protection against fluctuating maintenance costs. There’s certainly some security in knowing you’ll have help if an expensive repair comes along. On the other hand – and this comes from our experience processing extended warranty claims every week – these warranties end up being a losing proposition for 80-90% of drivers who purchase them. Over the term, most drivers never receive enough repair coverage to recoup the original cost of buying the warranty plan. For some thoughts on why we feel you should think twice about purchasing an extended warranty, please read on.
What is an “extended warranty plan”?
Also called vehicle breakdown protection plans or service contracts, extended warranty plans are a type of insurance policy. Even when purchased at a new car dealership, these plans are usually not provided by the vehicle manufacturer themselves. The dealership usually purchases the contract from an outside company such as Lubrico, First Canadian, LGM and others. This plan is then re-sold to you, for a sizable profit. Most providers offer different tiers of protection, with the more expensive plans covering more vehicle systems/parts. Like your auto insurance, most plans include a deductible. (Some also have a claim limit. We’ll elaborate on that later.)
Extended warranties administered through an independent company (not the automaker themselves) are referred to as aftermarket extended warranties. One benefit to an aftermarket warranty is that repairs can be performed at almost any auto service centre; not only at the dealership as with a factory warranty.
The claims experience is very different than a factory warranty.
Most of us are familiar with having a vehicle repair covered by the manufacturer’s warranty; it’s usually quite painless. As they reach the end of their factory warranty, many clients are expecting their extended warranty to work similarly. Unfortunately this isn’t the case. Approving repairs through an aftermarket extended warranty is a literal negotiation: We try to approve as much of the repair as possible, and the warranty company tries to minimize the expenditure on their end. In the end, we usually meet somewhere in the middle with the warranty company covering some of the repair cost, and the client picking up the rest.
These negotiations can take time, so approvals aren’t always as quick as they were during your factory warranty. Some warranty companies will send inspectors to examine larger (more expensive) issues before repairs are approved. These inspectors can take 3-4 business days to arrive, so the whole process sometimes involves having your vehicle at our shop longer than you might be expecting. Instead of a quick and completely free claims experience like your factory warranty, the claims experience typically takes longer and involves some cost to you.
Most extended warranties do not cover the full cost of a proper repair.
As we touched on above, most extended warranty claims that we process at our shop still involve some cost to the client. This is because in many situations, warranty companies will not cover the full cost of a proper repair. An example of this would be a recent claim where we replaced a client’s radiator. The warranty company paid for the radiator and the labour to install it, but wouldn’t pay for new antifreeze to fill up the cooling system. Most warranty companies have a price limit for each replacement part, too. This sometimes doesn’t cover the full cost of a quality part in the Canadian market. Because we won’t perform a low quality repair using cheap parts, we’ll usually stick with a premium/OEM part and ask the client to pay the difference. Warranty companies also won’t pay for extra time required to deal with rusted or seized bolts; to properly clean corroded or greasy parts before reinstalling them; or for other details that you expect as part of a premium repair.
Extended warranties do not pay for testing/inspection time.
Your car is running terribly, and you have an extended warranty plan. Perfect! We’d love to help with that, and then bill your warranty company for the repairs. Before we can start a claim, however, we need to determine why your car doesn’t run right. This could require 1-2 hours of testing, and extended warranty plans don’t cover that. Assuming the issue is (for example) a failed fuel injector, the warranty company will usually pay for the injector replacement but you might still have a bill of $150 or more for the diagnostic time. This is in contrast to a factory warranty, where diagnostics are included.
Imagine this situation: If the testing costs $150 and the injector replacement costs $450, but your plan has a $200 deductible, then the warranty company is only picking up $250 of the $600 repair! You’re paying more than they are.
In some cases, such as internal engine/transmission failures, the warranty company will not approve a repair until the engine/transmission is disassembled far enough to visually see (and photograph) the root failure. In the event of a major engine failure, this could involve 5-10 hours of disassembly to access the bearings and internal parts. The warranty company will ask you to pay for this, and will require your agreement before continuing. At this point, one of three things happens:
- If the warranty company approves an internal engine repair, this teardown time now becomes part of the repair, so you no longer have to pay.
- If the warranty company denies the claim, you will be responsible for the cost of the teardown time.
- If a complete engine/transmission replacement is required (meaning the old unit did not have to be taken apart, other than to satisfy the requirements of the warranty company), then you we be responsible for the cost of the teardown time – even though it was the warranty company who asked to have the teardown performed.
Most extended warranties have a claim limit, and this is important!
Let’s imagine that you have purchased an aftermarket extended warranty, and you experience a major engine failure. Thank goodness you purchased the warranty, right? This certainly should be a situation where the cost of the warranty ends up saving you money in the end. Unfortunately, most plans include a claim limit: a maximum amount of money that the warranty company will pay out per repair. This month we helped a client in this very situation, and they were very disappointed to learn about this claim limit. The cost of replacing the engine in this client’s Chevrolet Equinox was over $13,000 but their policy had a claim limit of only $3,500! This meant the client was on the hook for over $9000 of the repair.
Extended warranty plans have LOTS of exclusions.
Even the most comprehensive warranty plans still feature many exclusions; parts and systems that are not covered. Some plans are cleverly written: They include an impressive list of parts that are covered, but most of these are parts that almost never fail. Meanwhile, many common failure parts are excluded. Taken directly from a First Canadian contract, here is the long list of exclusions within one popular plan:
Throttle body; start light ignition batteries; zippers; windshield wiper arms and linkage assembly; headlamp; projection lamp and tail-lamp assemblies; cup holders; ashtrays; dash pads; consoles; seat frames and springs; convertible top and convertible top frame structures; inside and outside door handles and hinges; shock absorbers; MacPherson strut assembly (including upper mounts and bearings); pipes and hoses (except steering and air conditioning pipes and hoses), lines and rubber brake hoses (except power steering pressure hoses, steel air conditioning lines, and steel brake lines); fastening devices such as clips, nuts, bolts, fasteners, and rivets; standard transmission clutch assembly; manual clutch disc or pressure plate and related bushings and bearings; manual and hydraulic linkages; corroded cables; secondary ignition components; glass (including mirror assemblies and heated windshields); lenses; sealed beams; light bulbs; sockets; fuses; cellular phones; brake rotors and drums; components of exhaust and emission systems not specifically identified as part of the Emission System covered under section B.2(m) in the Schedule of Coverage; components of any Lift Kit; catalytic converter; weather strips; run channels; trim; moldings; bright metal; chrome; upholstery and carpet; paint; outside ornamentation; bumpers; body sheet metal and panels; structural body parts; sun roof frame and assemblies; tires; wheels and rims; and wheel or rim-mounted sensors, wind noise, squeaks, rattles, or water leaks.
Pre-existing conditions can leave you without coverage.
Most extended warranty plans do not cover pre-existing conditions (issues already present when you purchased the vehicle) or consequences that develop because of these conditions. In the event of a pre-owned vehicle purchase, how do you know there are no pre-existing problems? Even if the selling dealership has inspected the vehicle, some issues won’t be visible on a visual inspection. Here’s a story about one of those issues:
Earlier this year, we helped a lady who purchased a pre-owned 2013 Toyota RAV4, along with an extended warranty plan. Two weeks into her ownership, the engine developed a “low oil pressure” warning. Our technician diagnosed the issue as a failing oil pump inside the engine. After contacting the warranty provider and obtaining authorization for the repair, we started our disassembly of the engine. Inside the engine, we found heavy sludge build-up due to a dearth of oil changes over the years. Upon learning of this, the warranty company denied the claim and rescinded all future engine coverage on the policy. After paying over $4500 for their warranty plan, the client had to pay out-of-pocket for an engine replacement!
UPDATE: We have learned that in this case, even though they never could have detected this lack of maintenance, the selling dealership was good enough to pay for a portion of the engine replacement. The warranty provider has not offered a refund or price break on the warranty plan.
If you decide to purchase an extended warranty, here are some tips from a professional:
Despite the fact that they are usually a bad investment, some shoppers may still purchase a breakdown protection plan for the security of a more stable cost of driving. They might like the idea of making a regular monthly payment instead of paying for less frequent (but potentially larger, from time to time) repair costs. We can certainly respect this. Before you sign a service contract, we recommend the following:
- Make sure you understand the term length, in both months and kilometres. We have seen folks spend thousands of dollars on a plan that only covers their vehicle for 20,000 kilometres! That mileage will pass in less than a year for many drivers.
- Read the fine print. Make sure you know what’s covered, and what is excluded.
- Does the warranty provider have the option to “back out” of the policy? This will be buried in the terms and conditions. Some warranty plans give the provider the option to cancel your policy and issue a refund in the event of a very large claim. We had this happen to a client of ours after their transmission failed. The warranty provider walked away from the policy and refunded the $4,200 purchase price, but the client had to pay for a $7,000 transmission replacement.
- Write down the end-of-coverage date, and don’t forget it! Some warranty plans offer a partial refund of the original cost if you never make a claim; as long as you contact them within 1-2 weeks of the policy expiring. They will never contact you, though, as they’re banking on you forgetting about this.
If you are considering purchasing (or have already purchased) an extended vehicle warranty, we’re always available to answer your questions. Live in Airdrie? We’re happy to provide repairs through your policy too. We will negotiate with the warranty provider on your behalf and provide you with the best return possible on your purchase.