Do You Need an Auto Extended Warranty

An important factor to consider for an extended warranty purchase is the reliability of your car. Many top rated cars can go 5 or 6 years without major repairs. Quality has improved over the years. Back in the early 90's, most domestic new cars only had 1 year/12K mile factory warranties. Imports then started having factory warranties for 3 years/36K miles. Then the big 3 were forced to follow. One thing to keep in mind regarding extended warranties is that a 5yr/50K mile extended warranty typically would only cover a car with a 3yr/36K-mile factory warranty for an additional 2yr and 14K miles. Like factory warranties, extended warranties usually start at the new-car purchase date.

So if you have a reliable car, it may not pay to have an extended warranty. To determine your car's reliability, you can check with the reliability ratings at Consumer Reports. In its spring auto guide, it includes ratings for predicted reliability. It's a forecast of how well a new car will likely hold up based on the model's recent history. The data is based on Consumer Report survey responses from their subscribers. The reliability scores are divided into 5 categories from best to worst.

Some examples of cars with top reliability ratings include the ones you would typically expect such as Toyota Prius, Toyota Corolla LE, Honda Civic EX, Toyota Camry LE, and the Lexus LS430. There were a few surprises in the top reliability ratings such as the Pontiac Grand Prix GT V6. The Chevrolet Impala LS V6 scored didn't get a top score but had a respectable second best score, likewise for the Hyundai Elantra GT and the Nissan Maxima 3.5 SE V6.

Then there were those that scored in the middle that I expected would have been either the first and second best. These include the Volkswagen Passat GLS and the Nissan Altima 3.5 SE V6. The other midpackers were more of what I expected such as the Dodge Neon SXT, the Ford Taurus SEL V6, and the Hyundai Accent GL.

And finally, there were many with the lowest two scores. For these, it's probably a good idea to get an extended warranty. I was surprised to see many BMW models with these low scores. They included the BMW 530i and the BMW 745li luxury sedans, and the BMW X5 3.0i mid-sized SUV. Also, I was surprised to see the Saturn Ion, the Saab 9-3 Aero and the Nissan Sentra 1.8s near the bottom. Then there were the models that didn't surprise me. These included the Chevrolet Trailblazer EXT LT, GMC Envoy SLE, Pontiac Bonneville SE, the Cadilac SRX V8, and the Chevrolet Malibu.

Another good source of car reliability information is J.D. Power Consumer Center for Autos. I did a little comparison of J.D. Powers with Consumer Reports using BMWs. There was some correlation with the 2003 BMW 7 Series. J.D. Powers had a score below average on overall quality. However, the other models scored okay. It had an average quality score for the BMW 5 Series, and an above average score for the X5 series.

Other Auto Extended Warranty Options

There are two types of extended warranties. The first is what is most commonly sold by dealerships or by aftermarket sellers on the web. These are known as service agreements or vehicle service contracts. The second type is not as well known. It's called mechanical breakdown insurance (MBI). Unlike the first type, this is an insurance product that is regulated by a state for both coverage and price. MBI contracts can only be sold by licensed agents. The advantage of MBI policies is that they're backed by large insurance companies.

There are several places where you can buy mechanical breakdown insurance:

• Geico - In addition to regular auto insurance, Geico also sells MBI policies. But you have to have Geico auto insurance to get their MBI coverage. One advantage is that MBI price can be included as part of your car insurance premiums. It's intended for cars less than 15 months old. The coverage can last for up to 7 years or 100K miles.
• Credit Unions - Your local credit unions may offer MBI. If you're not a member of a credit union, you may be able to join one just based on where you live. The National Credit Union Administration can be used to find a credit union in your city. Here's one example of a credit union's MBI policy, and here's more background on credit unions and MBIs.
• MBA Direct sells MBIs directly to consumers on their website. Since they sell MBIs and not vehicle service contracts they can even sell on the web to people in California (California had passed a law banning the sell of vehicle service contracts from the internet.) Their policy can last up to 10 years or 100K miles. Many of the details are available at their FAQ.

Deals on Factory Extended Warranties

After some investigation at Edmunds, I found another way to get a good deal on car extended warranties. In this case it was a Ford extended warranty. The thread mentioned two websites that offered Ford extended service plans. One was Ford Warranty Central. This site sells service plans backed by Ford Motor Company, not aftermarket car warranties from independent warranty companies. Unfortunately it requires a phone call to receive quotes. The post mentioned a quote that was given for an Escape 4x4 that ranged from $1,045 to $1,400 for a 5yr/100K contract.

The other website for the Ford extended warranty was at Mid-States Ford. Someone in this thread considered this site very competitive, and provided a quote that he was given for his Ford Mountaineer: $1045 for 6 year/75K miles.

In both of these cases, they mentioned that they received much better deals than the 'best quote' provided by the local dealer.

I then started looking for similar websites for Honda, Toyota, GM, etc. I couldn't find similar websites. However, I did find another mention of a Toyota extended service plan deal. The person claimed to get a 7 year/75K mile $0 deductible extended warranty for $690 on his Toyota Tundra at a preferred dealer. He claimed it would have been $1300 for the same plan if bought directly from Toyota.

As I've mentioned in previous posts, be sure to check all of your local dealerships for the best deals on factory extended warranties.

A Few Tips for Extended Car Warranties

If you're searching for a new or used extended auto warranty, knowing a few important things can help you save money. Edmunds.com has several articles discussing car warranties. Here are some tips that I found useful:

• If you're considering an manufacturer's extended warranty, check prices at several dealerships. Don't hesitate to ask about their markups and to negotiate for the best price.
• Beware of dealers pushing aftermarket car warranties. They usually only offer these to make more money.
• Some extended warranties have buy-back clauses that allow you to get some or all of your money back if you don't use the contract.
• If you don't have an extended warranty, you sometimes can get after warranty assistance from a dealership if you've dealt with the dealer for maintenance and have kept the car well maintained.

One of the articles gave an example for a Honda car warranty. The exmaple included a 2000 Honda Odyssey. The Honda Manufacturer's Limited Warranty that came with the purchase was the typical 3 years/36K miles. The manufacturer brand Honda extended warranty ranged from a retail price of $1435 that covered 7 years/100K miles with $0 deductible to a price of $965 for 4 years/60K miles and $50 deductible.

It gave an example of a comparable aftermarket Honda extended car warranty. In that case the maximum price was $1072 for 5 years/100K miles with a $100 deductible. The other options were comparable in price with different year and miles.

Info on Warranty Activation Headquarters

A few months ago I received in the mail an ad from Warranty Activation Headquarters. They claimed that I was pre-selected for a special offer for an extended vehicle warranty policy. So I did some searching to see what kind of history this company has.

First, I found them mentioned on Rip-Off Report. A lady told how she had paid $1870 for a policy and when she had a problem with her car's horn, they refused to cover it. An employee for this company added a rebuttal to her charge describing why the problem with her horn is not covered. Perhaps this bad publicity made the company think twice. The lady followed up with another two posts saying that the company finally agreed to pay for the repair.

Next, I went looking for the Better Business Bureau of Eastern Missouri and found a long page describing Warranty Activation Headquarters. It doesn't look too good. At the time of this post, the company's membership has been suspended for non-compliance with the Bureau's membership standards. This BBB does a good job at giving details of the 158 complaints that have been processed over the last 36 months. The BBB mentions that "some of the complaints were resolved. However, for other complaints, the consumer remains dissatisfied despite the company's reasonable effort to resolve the complaints."

Biggest Concern about Auto Extended Warranties

The most worrisome issue about auto extended warranty contracts is the possibility that the company will go out of business leaving you with a worthless contract. This is why Clark Howard (nationally renowned consumer advocate) recommends against any contract other than one from the manufacturer or from your car's insurance company (like Geico). He's usually against all extended warranties but is neutral on auto extended warranties due to the fact some people may not be able to afford a costly repair.

Warranty Direct's Insurer Strength

The auto extended warranty companies try to ease our concern over this by advertising that their plans are insured and reinsured by financially strong insurance companies. For example Warranty Direct says all of its contracts are insured by National Service Contract Insurance Company (this is based on an email they sent me in response to my insurance question.) It claims that this company has a financial stability rating of A (exceptional).

I did a check at A.M. Best on this company. Currently this company (National Service Contract Ins Co RPG) has a NR-4 rating which took effect on April 1, 2004. NR-4 means that the company has requested a non-rating. This non-rating seems to be a way for companies to hide their true rating. A.M. Best had a press release dated December 23, 2003 which stated:

A.M. Best Co. has downgraded the financial strength rating to B++ (Very Good) from A- (Excellent) of National Service Contract, RRG (NSC) (Honolulu, Hawaii).

Warranty Direct says its contracts are reinsured with Hannover Reinsurance Ltd., (A Excellent rating). The current A.M. Best rating seems to corroborate this. I've heard stories about Warranty Gold having a reinsurer with good financial strength, and this proved not to help when Warranty Gold's insurer went out of business.

1SourceAutoWarranty Insurer Strength

I also checked on the insurance status of another popular auto extended warranty provider, 1SourceAutoWarranty. At least Warranty Direct responded to my email question (in less than a day). I never received a response from 1SourceAutoWarranty regarding its insurance. The site carbuyingtips.com claims 1SourceAutoWarranty is insured by PrimeGuard, Inc. A.M. Best has a NR-1 rating on this company. This is a non-rating based on insufficient data. It's interesting that carbuyingtips.com doesn't discuss these issues in its review of 1SourceAutoWarranty or Warranty Direct. Since it's an affiliate with these companies, there's no incentive to say anything bad.

Auto Extended Warranty Plans from Manufacturers

Another interest claim I read was from sites that are advertising auto extended warranties from the auto manufacturers. The claim is as follows:

The 10 leading independent providers 10 years ago are all out of business today. That means a large number of customers who had valid claims were not paid or received only partial reimbursement.

I wonder where they got this from. Of course these sites have a bias to make the independent auto extended warranty providers look bad. Searching for this quote led me to the following sites:

• Honda Care Extended Warranty
• Ford Extended Warranty
• Subaru Extended Service Plans

All of the above sites offer extended warrany plans backed by the manufacturer. These are probably more expensive the what you could get at independent providers, but you know they'll be around when you need them.