The Car Dealer's Extended Warranties

Extended warranties are one of the most common "extras" that a customer can buy while in the "F&I" office. They are warranties that will cover the vehicles repairs cost after the manufacturer’s “new car” warranty expires. 

 

Warranties that are offered on vehicles are limited warranties, meaning they are restricted by length of time or the vehicle mileage. For example, a new car warranty could be three years or fifty thousand miles. This means that the car would be protected by the warranty for a maximum of three years or fifty thousand miles, which ever occurs first.

 

On occasion, salespeople will classify a warranty as being “bumper to bumper” which implies that the warranty will cover the entire car. All car warranties have limits to their coverage.   For instance, most warranties will not cover items that are prone to wear and tear, like tires and brakes. Also, Warranties will not cover repairs that are needed because lack of proper maintenance. If the engine “blows” because the owner failed to put oil in the vehicle, the warranty will not pay for the repairs.

 

Also, some manufacturers will split their warranties limitations to cover specific items in the vehicle. Often dealers will offer a short “bumper to bumper” warranty and a longer power train (engine and transmission) warranty.

 

Regardless of the original manufacturer warranty, the “F&I” manager will offer the customer an extended warranty. Generally there are two kinds of extended warranties that the customer can purchase: Manufacturer or Independent.

 

 

The first could be a warranty that is offered from the manufacturer. For instance, when a customer purchases a Toyota, it will include a three year warranty and then the customer will have an option to “extend” that warranty for an extra cost. 

 

The dealer's profitability produced by the manufacturer’s extended warranty has diminished in recent years. This is largely due to the new technologies require expensive components on the vehicle to be replaced rather than repaired.

 

The second would be an independent vendor. These are warranty companies that are not connected to the manufacturer and they offer what is called an “Extended Service Contract”. These companies essentially will work like an insurance policy for the vehicle.  Be aware these companies will range wildly in effectiveness and price. 

 

We suggest that you do extensive research on these vendor service contract companies.  Many car-buying-advice websites sell advertising to these “independent warranty companies” and as a result they will endorse them. However, some of these independent warranties will require multiple deductible per visits and unlike the manufacturer's warranties, the repairing dealer may have to make a claim to be reimbursed through and third party administrator. Not to mention, that some companies may authorize repairs to be completed with previously used parts. These companies may be cheaper but the consumer may run the risk of lesser coverage.  In some instances, these companies can become instantly defunct rendering their agreement worthless.

 

If the customer thinks they are buying a “Honda” extended warranty they should not sign something that reads “National Warranty Co.”.

Manufacturer warranties are backed by the same company that made your purchased vehicle and are generally more reliable but are normally more expensive. However they all not equal. On any warranty, the customer should read the coverage that it is providing.

 

-Be aware of the deductible. Most of the quality manufacturer's warranties will not charge a deductible.

 

-Be aware of wear and tear clauses. These are clauses that allow the warranty company to reject a repair claim because they determined it occurred because of natural wear and tear.

 

If the “F&I” manager is selling you a "manufacturer's extended warranty read the fine print to make sure it is a "manufacturer extended warranty" and not a third party vendor.  Keep in mind, the finance manager is a salesman and they will be paid on the profit that they generate in their department. Since these third party warranties cost much less they can sell them for more profit. If the customer thinks they are buying a “Honda” extended warranty they should not sign something that reads “National Warranty Co.”.

 

Most legitimate warranties can be canceled and the buyer is refunded their balance of the unearned premium.  However, keep in mind; they will first refund the bank if the vehicle is financed. Also, most warranties may be transferred to the next owner.