Should You Buy an Extended Warranty From a Used Car Dealership?

Buying a used car is tricky enough, but by the time you have the car inspected, negotiate the best price and secure your financing, you'll have a decision to make: Should you buy an extended warranty or not? There are pros and cons to buying extended warranties. In some cases, having a warranty can be a lifesaver; in others, it can be a waste of money. There are a number of factors to consider when determining if an extended warranty is right for you.

Benefits

Buying an extended warranty on a used car can give you peace of mind. Buying a used car is generally considered a smart move because you don't have to absorb the initial depreciation of a new car; however, buying a used car comes with risk. Many used cars have no remaining factory warranty, and you may be stuck paying for any repairs out of pocket if you don't have an extended warranty. An extended warranty will generally cover at least the major components of the car, such as the engine and transmission.

Disadvantages

The average consumer, according to Consumer Reports, pays roughly $1,000 for an extended warranty, yet receives an average of $700 in benefits. On average, extended warranties do not pay off. In a situation where you don't have to use the warranty at all, the entire cost of the warranty goes down the drain. If the cost of out-of-pocket repairs does not exceed the cost of the warranty, then buying the warranty was not a wise financial move.

Considerations

Extended warranties are not created equal. Some warranties cover most factory-installed equipment, similar to a new car warranty; others cover only the major vehicle components. Some extended warranties come with a zero or low deductible, while others come with a higher deductible. The more items the warranty covers, and the lower the deductible, the higher the price for the extended warranty tends to be.

Warnings

New car dealers often sell extended warranties backed by the manufacturer. Because used car dealers do not have the backing of a large automaker, they generally sell warranties issued by aftermarket financial companies. Consider the reputation of the company prior to purchasing an extended warranty, rather than relying on the good reputation of the used car dealer. It's not the car dealer, after all, that makes the decision to approve or deny extended warranty claims. Research the warranty issuer by checking out its Better Business Bureau profile. Reliable companies will have a low rate of complaints, and high rate of resolution of the complaints they do have. Shy away from companies with high rates of unresolved complaints.