Are Car Repair Insurance Worth It

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Dealership calendar | Cars.com analogy by Paul Dolan/Svyatoslav Lypynskyy

By Rick Popely

March 27, 2022

The average new-vehicle loan is for half dozen years, according to data from Experian , longer than the typical manufacturer'south warranty, and many people hang on to their vehicles far longer than that. In one case the warranty expires, the toll of all repairs comes out of the pockets of owners, and nervousness well-nigh that prospect has made buying an extended warranty a popular selection. Most one-half of consumers who purchase a new or used vehicle from a franchised dealer opt for an extended warranty, according to the National Automobile Dealers Association .

Related: Which 2022 Vehicles Have the Best Warranty Coverage?

Though they are commonly referred to as extended warranties, the correct term is extended service contracts. They don't lengthen the manufacturer's warranty, so they may not cover the same parts or accept the same benefits and restrictions. Rather, they are insurance policies that hope to repair or replace certain parts if they suspension, and they always come with specific exclusions (as exercise manufacturer warranties) well-nigh what is covered.

Another big departure: A warranty is included in the cost of a vehicle; you have to pay extra for an extended service contract.

The main reason people buy an extended service contract is to be protected against major repair bills, such equally a new transmission or an engine rebuild that can toll thousands of dollars, after the manufacturer'southward warranty ends.

The biggest question for many, though, is how much does a service contract cost, and there is no simple answer. It might be less than $1,500 or it could exist more than than $3,000, depending on whether it'due south for a new or used vehicle, the historic period and mileage of the vehicle, the length of the contract and what it covers. Some cover just major powertrain components, and others provide bumper-to-bumper coverage.

A service contract for a vehicle from a make that has a strong reputation for quality will cost less than ane from a brand that frequently ranks depression in reliability surveys. That's because the company that backs the service contract expects to have to pay for fewer repairs.

Is an Extended Service Contract Right for You?

Though a service contract tin can provide peace of mind and oftentimes sounds similar a smart determination, there are several reasons not to purchase ane when you buy a vehicle, whether new or used, peculiarly if it's covered past a manufacturer's warranty.

Later conscientious consideration, you might decide a service contract isn't worth the money. Here's why:

A service contract won't pay for repairs covered by the manufacturer'due south warranty. If you buy a new car with a three-year/36,000-mile basic warranty, you probably won't utilize a service contract during that time. Annihilation that breaks would be covered by the manufacturing plant warranty (excluding normal wear items, such as restriction pads and rotors). Major engine and transmission parts may likewise be covered for five years/60,000 miles (or longer) by the powertrain warranty. Under that scenario, you may never use a service contract that lasts 5 years, so you're paying for something yous already had for free.
Many consumers who make use of a service contract acquire the hard mode that their contract costs more than they collect in benefits. Vehicles frequently last more than 10 years without requiring major repairs, so the mechanical disaster they feared may never happen. For instance, someone pays $2,000 for a contract, but the only covered repairs during the life of the contract amount to $1,350. They would have been better off putting money in a piggy bank instead.
Moreover, all service contracts have exclusions, and then the repairs you need might not be covered, such as engine damage from overheating. Here'southward some other possibility: An oil seal fails and causes internal engine harm. The internal damage is covered, but the oil seal isn't, and the contract administrator might refuse a claim considering a noncovered role acquired the damage. In improver, with some contracts, claims can be rejected if the vehicle owner can't show proof of regular maintenance (the same is truthful for warranties).

If You lot Want a Service Contract, Choose Carefully

If y'all determine that a service contract is right for you lot, here are a couple of considerations when shopping for one:

You lot don't have to buy a service contract when taking delivery of a new or used vehicle. If the vehicle is under warranty, yous have lots of time to check out other service contracts.
You have options. Numerous independent contract providers advertise on the net, and you tin can compare prices on those besides as on manufacturer-backed contracts sold past other dealerships.
Some dealers merely offer contracts backed by the vehicle manufacturer or an affiliated company, only many others also offering plans from independent companies. Subsequently you take delivery of a vehicle, you might hear from independent service contract providers who scoured public records to find out you recently bought a vehicle.
If a dealer is pushing a contract from an contained provider instead of the manufacturer, it might be because it has a college profit margin for the dealer, non because information technology provides ameliorate coverage.
Many independent companies provide adept service and receive loftier marks from customers, but some independent providers accept gone out of business organization. It's not frequent, simply it happens, so investigate the company'south reputation and whether it has good financial backing.
At a dealership y'all might be encouraged to scroll the toll of an extended service contract into the loan for the vehicle you're buying. That's convenient, but it as well means you lot'll be paying interest on it.

Of import Questions to Ask Before Purchasing a Service Contract

Is there a deductible for each visit? You might have to pay $100 or $150 out of pocket every fourth dimension. Is the service contract transferable to another owner if you sell the vehicle to an private? (They aren't transferable if you lot sell to a dealer.)
Where can you lot go for repairs? Manufacturer-backed contracts typically require that yous go to a dealer, and exceptions are rare. Other contracts may accept restrictions on where you tin can take your vehicle or let you choose the repair shop.
Does the service contract pay the repair shop for covered repairs or do you have to pay the nib and then file a merits to be reimbursed? Afterward yous pay for a repair, can a claim exist rejected?
Tin you read the contract you will have to sign earlier you lot concord to purchase? That's where you'll find the fine print that spells out all the rules and exceptions, non in the glossy brochure or the online advertising, where everyone pictured has a big smile. If the seller won't show you this information before you sign the contract, take your business elsewhere.
What are the exclusions and your requirements? Here, likewise, y'all will need to see the bodily contract to notice out what is not covered and other restrictions. Don't believe it if a salesperson says, "Oh, it covers everything." It won't, and you should find out what isn't covered before you purchase.

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