Extended Warranties and Leasing

If I am leasing do I need an extended warranty?

The answer to this question is a qualified no. One of the basic rules of leasing is not to lease outside of the manufacturer's warranty. Think about how it would ruin your day to have to pay $1500 to replace the transmission on a leased vehicle you don't own and will turn-in in six months. So if you keep the lease short enough so that the vehicle is always under warranty, then you don't need an extended warranty. But extended warranties are high profit add-ons for dealerships who, it seems, will stop at nothing to sell you one (see Top 10 Leasing Scams - Extended Warranty Rip-off). Behold some of the bogus arguments salesman will use to trick you into paying big bucks for unneeded warranties.

1. Pitch: "This special price on the warranty is only available through us at the beginning of the lease. If you decide to buy the car at the end of the lease the warranty will cost you much more."  Translation: "Chances are, you won't buy the car at lease-end, so if you don't buy it from me now, I won't get a bonus."
2. Pitch: "This is such a good deal, we make it a standard item for all vehicles we sell, even leases." Translation: "All our customers are suckers and we expect no more of you."
3. Pitch: "This is much more than a warranty. It also covers all of your regular scheduled maintenance and oil changes. It practically pays for itself!" Translation: "The $950 warranty I am selling you will save you $90 on oil changes."
4. Pitch: "This extended warranty will make your car worth more money at the end of the lease." Translation: "Why should you care? It's not your vehicle."
5. Pitch: "The warranty is refundable if you turn in the vehicle at the end of lease." Translation: "I'm going to forget to tell you that the refund is prorated from the day that you sign the lease so in effect most of the extended warranty is wasted during the time while the vehicle is under the manufacturer's warranty."

As you are bombarded with this nonsense, just ask yourself: why should I pay to extend the warranty to six years on a vehicle I don't own? The answer is you shouldn't as long as you lease within the manufacturer's warranty. In fact, even if you were buying the car, most auto buying experts will argue that extended warranties are not good investments. Not only are they overpriced (especially when purchased from a dealer), but they tend have high deductibles and are full of strings and loop-holes that limit their benefit.

I am leasing or plan to lease longer than the manufacturer's warranty. Should I buy a warranty contract?

Despite what's been said above, there are some situations where one could end up leasing beyond the manufacturer's warranty. Here are three that we could think of:

1. The manufacturer's warranty is unusually short. For example Volkswagen only offers a 2 year / 24,000 mile warranty and your budget may dictate a 3-year lease.
2. You are leasing a used vehicle with little or no manufacturer's warranty remaining.
3. You already leased the car for 60 months and didn't' know any better.

Those who find themselves in such situations basically have two options. 1) Take a chance that the vehicle will remain in good mechanical condition and that repair expenses during the lease period will be tolerable, or 2) Fork over the cash for an extended warranty contract.

Extended Warranties 101

If you opt to go the extended warranty route, here's what you should know.

1. They are not cheap. Be prepared to pay anywhere from $400 to $2000 depending on factors such as make, model, year, mileage, and duration of contract. The average service contract extends warranty coverage through 6 years or 100,000 miles and costs $1150.
2. Extended warranties cost more when purchased from a dealer. According to a study by the New York Attorney Generals office, dealer mark-ups range from $200 to $900. It is no wonder dealers push warranty contracts so hard - even when they are not needed. The best bet is to shop around before buying. You can get free on-line quotes at many of the warranty companies web sites, including American Auto Warranties  who claims their warranties cost substantially less than warranties offered by dealers with same coverage.
3. Warranties cost less for models with better repair histories. For example, a 7-year 100k mile bumper-to-bumper warranty on a Toyota might cost $700 vs. $1,100 for the same warranty on a Ford Explorer. Asian built vehicles such as Toyota, Honda, and Nissan are considered Class 1 and cost less to extend the warranty as compared to Chevy, Dodge, and Ford who are considered Class 3.
4. Not all warranties are created equal. Dealers tend to offer mechanical breakdown protection which means that the part has to break for it to be covered. Look for true "bumper-to-bumper" type warranties that cover parts even if they wear out.
5. What is and is not covered. Don't expect the extended warranty to cover every single function and part on your car. Most service agreements exclude coverage on a long list of items such as batteries, shocks, brakes, clutch assemblies, headlight bulbs, lenses, etc. Be sure to read the contact over carefully and understand the exclusions.
6. Beware of the dreaded deductible. Most service contracts require you to pay a "deductible" when you make a claim. Deductibles can range from $0 to $250, and depending on the language of the contract, can significantly limit the benefits of the warranty. For example, there is a big difference between paying a $50 deductible on "each covered item" vs. a $50 deductible per repair visit. If your vehicle already has a lot of miles ask about a zero-deductible option. Warranty Gold offers this for an additional $75.
7. Radius requirements. Some warranties may require you to get your car repaired at the dealership if you are within a 50-mile radius of the dealer. In contrast, other warranty companies allow you to get your vehicle repaired anywhere anytime.
8. Will the warranty company still be around in five years? Warranty contracts cover long periods of time were your potential benefits may not be realized for several years. If the warranty company goes out of business during this time you are basically screwed. Make sure the company you buy from has been around for a while and is in good financial health. Stick with warranties backed by the manufacturer or from large, reputable companies.
9. Beware of phony "refundable" contracts. A favorite sales gimmick used by dealer's to push over-priced warranty contracts, is the "refundable" policy. These policies promise a full refund at the end of the contract if no claims are made. Mark Eskeldson in What Car Dealers Don't Want You To Know, points out that this brilliant marketing strategy actually discourages people from making claims, particularly if the claims are required to be made within a specified time after the repair (typically 30 to 60 days). Eskeldson writes,

"Let's say your car needs a $600 repair in the fourth year, but you don't file a claim because you want a full refund of the $1800 you paid for the warranty. In the 5th year, your car needs another $600 repair (you're still hoping to get your money back). In year six, another repair is needed, this time $1,000.

"What do you do now? If you file the claim, you'll only be covered for the latest repair, not the first two that cost $1,200. You won't get your $1,800 back and your total repair costs will be $3,000, including the warranty. If you don't file the claim, you will get the $1,800 without interest, but only you spent $2,200 on repairs. Had you put the original $1,800 into an account paying 5% interest, you would have had over $2,200 to pay the bills."

In such a scenario, it's clear to see who the winner is.

Bottom Line
If buy an extended warranty do your homework first. Read the contract carefully and understand what is covered and what isn't. Pay particular attention to the "exclusions" list - parts that aren't covered by the warranty. Remember your choice of vehicle will affect the cost of the warranty with warranties for well-built vehicles with good repair histories will cost less. Shop around before buying and compare both price and coverage. Stick with large, reputable companies that have been around a long time, and most important point of all: treat everything the salesman says with the utmost skepticism.