Extended warranties are one of the most common “extras” that a customer can buy while in the “F&I” office. These are warranties that will cover the cost of the vehicle’s repairs after the manufacturer’s “new car” warranty expires.
Warranties that are offered on vehicles are limited warranties, meaning that they are restricted to a length of time or the vehicle’s mileage. For example, a new car warranty could be 3 years or 50,000 miles. This means that the car would be protected by the warranty for a maximum of 3 years or 50,000 miles, whichever comes 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 example, most warranties will not cover items that are prone to wear and tear, such as tires and brakes.
Also, warranties will not cover repairs that are needed because of 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. Further, 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’s 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.
Manufacturer Car Warranties
The first could be a warranty that is offered from the manufacturer. For example, when a customer purchases a Toyota, it will include a 3 year warranty and then the customer will have an option to “extend” that warranty for an extra cost.
The dealer’s profitability from a manufacturer’s extended warranty has diminished in recent years. This is due largely to the new technologies that require expensive components on the vehicle to be replaced rather than repaired.
Extended Service Contracts
The second is a warranty from an independent vendor. These are warranty companies that are not connected to the manufacturer and that offer what is called an “Extended Service Contract.” These companies essentially will offer an insurance policy for the vehicle. Be aware that these companies will range wildly in service 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 will endorse them as a result. However, some independent warranties will require multiple deductibles per visit and, unlike the manufacturer’s warranties, the repairing dealer may have to make a claim to be reimbursed through a third party administrator. Moreover, 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 lower coverage. In some instances, these companies become defunct instantly, rendering their agreement worthless.
Manufacturer warranties are backed by the same company that made the vehicle you purchased and are generally more reliable, but also more expensive. However, they all not equal. On any warranty, the customer should read carefully the coverage that it provides.
- 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 that it occurred from 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 really is a “manufacturer’s extended warranty” and not one from a third party vendor.
Keep in mind that the finance manager is a salesman who will be paid on the profit that he generates in his department. Because these third party warranties cost much less, the dealer can sell them for more profit. If the customer thinks he is buying a “Honda” extended warranty, he should not sign something that reads “National Warranty Company.”