Car buyers naturally spend most of their time researching what vehicle to buy and how much to pay for it. Few consumers put much effort into researching the add-ons that they will be offered in the dealership’s finance office. The lack of preparation can cost thousands if you don’t know which add-ons are worth it, and which ones to avoid.

Buyers will almost always be offered an extended warranty of some kind. They go by a lot of names, including extended service contracts, extended warranties, mechanical breakdown insurance, service agreements, and vehicle protection plans. Most promise to pay for unexpected repairs after the manufacturer’s warranty expires.

Should you consider an extended warranty on a new or used car? It depends on a lot of factors. We’ll guide you through the decision-making process on the following pages.

What Is an Extended Warranty?

Most extended warranties (and other similar contracts) are agreements to cover auto repairs after factory warranties have expired. The items that they include vary from plan to plan, but they don’t typically cover wear-and-tear or routine maintenance items such as brake pads, tires, air cleaners, or oil changes.

Some plans include extras, like towing, roadside assistance, or trip interruption protection. In some cases, you’ll have to pay a deductible before the plan kicks in, while others will pay every dollar of repair costs. They typically will cover your vehicle for a set number of years, miles, or both.

Some car warranty providers offer “wrap” policies. Many vehicles come with powertrain warranties that are longer than the car’s bumper-to-bumper warranties. A wrap policy provides extended coverage to repair anything other than the vehicle’s powertrain.

In the end, buying an extended warranty is a gamble. You may pay a couple of thousand dollars for a plan you never use, or you could have one major component failure that would have cost you far more than the warranty you purchased.

Do I Need an Extended Warranty?

The first questions you need to ask yourself have nothing to do with the vehicle that you are buying. Are you someone who will have trouble sleeping the day after your car’s warranty expires, thinking about the expenses you might be facing? If you say yes, you might want to consider a warranty for peace of mind.

Do you have the discipline to put a couple of thousand dollars aside as part of your emergency fund to pay for unexpected repairs? If the answer is yes, you can probably skip the extended warranty. Do you put so much mileage on your car each year that you will quickly blow through the manufacturer’s warranty? If that’s the case, you might consider an extended warranty.

Will costly car repairs bust your monthly budget, making it hard to pay for essentials such as rent, food, or utilities? Answer yes, and you might want to consider either a warranty or, if you are a disciplined enough saver, the creation of an untouchable fund that’s set aside for unexpected events.

How Do Extended Warranties Work With New Cars?

If you are considering an extended warranty on a new car, you should start by asking yourself how long you plan to keep the car and how many miles you drive each year. Compare them to the bumper-to-bumper and powertrain warranties included with the vehicles you are considering.

For example, if you usually keep your cars for about six years, and you’re looking at a 2018 Kia Sorento with a five-year/60,000-mile basic warranty and a 10-year/100,000-mile warranty, it’s probably a good choice to skip the extended coverage. If you hope to keep your car for 10 years and it only comes with a three-year/36,000-mile warranty, you might consider extended warranty coverage for peace of mind for the first couple of years after your new car warranty expires.

You’ll also want to look at the predicted reliability of the vehicles you are considering. If you see low scores, that’s a hint that an extended warranty might be a good idea. Cars with high marks are less likely to need costly repairs. Predicted reliability is reflected in our new car rankings and reviews. They’re a great place to start there when you are doing your research.

How Do Extended Warranties Work With Used Cars?

When you’re considering an extended warranty on a used car, you have many resources that can help you make an informed decision. If you’re looking at a car that isn’t reliable in the long run, getting an extended warranty may save you money.

Our used car rankings and reviews use data from the J.D. Power Vehicle Dependability Study or their Predicted Reliability rating to show which vehicles are likely to be more expensive to own as they age.

You can also look at user forums and reviews online. While they tend to be places where disgruntled owners go to vent, they are also a good place to note trends. If everyone is talking about transmission failures at 60,000 miles, for example, there’s probably a design or manufacturing defect.

You can also get a lot of information about a used car’s future reliability from a pre-purchase inspection by an independent mechanic. They’ll note the problems that the vehicle currently has, as well as issues that they think will cost you money down the road.

Which Extended Warranty Should I Choose?

Selecting which extended warranty or service contract is not very straightforward. Every plan covers different things and comes at a different price. Some are backed by the car’s original manufacturer, while others come from individual dealers or car warranty companies.

Because the contracts and offerings are so complex, you don’t want to jump to a quick decision.

One critical question you should ask is how you will be reimbursed for repairs. Will they work directly with the shop, or will you have to pay out-of-pocket and wait for reimbursement to arrive? Do you have to wait for pre-approval from the warranty company before the shop can start repairs?

You’ll want to determine if the contract is transferable. Not only is it great that you can give your car to a son or daughter with the peace of mind that they are covered, but it can also increase the car’s value if you choose to sell it.

More questions you should have answered before you buy are listed on the next few pages.

What Does the Contract Cover?

There are two types of extended warranty coverage typically offered: inclusionary and exclusionary. An inclusionary warranty only covers items that are specifically listed in the contract. An exclusionary warranty will have a detailed list of those items that are not covered by the agreement.

In general, you want to have an exclusionary contract. Even then, you’ll want to go through line-by-line to make sure that expensive items that may fail are not excluded. Exclusionary policies will typically come with higher price tags than inclusionary policies.

Note that the brochure or sample contract for an extended warranty or service protection policy is not the actual contract – it’s just marketing. Insist on seeing what is shown on the actual agreement before you agree to purchase any vehicle protection product.

Where Can I Get My Car Serviced?

The question of where the warranty is honored is critical. Are you limited to one specific repair facility or dealership? What happens if your car breaks down if you’re traveling? Can you go to any of your car brand’s franchised new-car dealers for service?

Don’t make any assumptions, because if the dealer goes out of business or for some reason you no longer want to get it serviced at a specific place, your warranty could be worthless.

Those details should be spelled out in the contract. If you can’t get a good answer, you should consider it a red flag.

Who Is Backing the Warranty?

You’ll want to know who is behind the warranty coverage. Some extended warranties or service contracts are backed by auto manufacturers. This is especially common with the extended warranty coverage you get when you purchase a certified pre-owned car. Other warranties are backed by independent companies that have no relationship with either the dealer or manufacturer. Before you sign a contract with a third-party warranty company, you’ll want to spend some time online checking them out to see what other customers are saying and whether there are any consumer complaints against them. If they go out of business, your contract will likely be worthless.

Some extended warranties are backed by the auto dealership itself. You’ll likely be limited to getting your car serviced at that location, plus you’ll be in jeopardy of losing your coverage if they close or sell out.

Where Should I Buy an Extended Warranty?

If you’re buying a vehicle at a car dealership, you’re almost guaranteed to be offered an extended warranty when you are signing your paperwork. Manufacturer-backed programs are typically only available at their dealerships.

You can also buy a vehicle service contract from most lenders and insurance companies. Even if you don’t get your auto financing from them, many credit unions and banks can sell you some form of service contract.

Before you decide on where to get an extended service contract, you’ll want to carefully evaluate what is covered and compare costs between the different sellers. Be sure to include the value of any extras, such as roadside assistance, into your math. Vehicle protection plans with low or no deductibles will cost more than plans that have high deductibles.

How Should I Buy an Extended Warranty?

If you a buying an extended warranty at the same time you’re buying a vehicle, you might be tempted (or encouraged) to include the cost in your financing. It’s not a great idea to do so, for a few reasons.

First, it’s a great way for the seller to hide the actual cost of the contract. The dealer’s finance manager might try to sell the plan that will only add $29.99 per month to your payment, when you do the math on a six-year car loan you’ll find that the warranty will cost you $2,160.

The second is that you don’t want to pay interest on the cost of the warranty. While some companies will offer zero-percent financing on the contract, with most, you’ll have to pay the same rate as you’re paying on the rest of your auto loan.

Finally, every dollar you add to the loan that is not reflected in the value of the car raises your loan-to-value ratio and puts you at increased risk of owing more on the car than it is worth. That’s a problem if you total the car or it is stolen.

Best advice: Pay for any extended warranty coverage upfront, or wait until you have the money saved up to buy the service contract.

When Can I Buy an Extended Warranty?

Often when a dealer’s finance officer is trying to sell you a service contract, there will be pressure to “buy today to get a deal.” The truth is, you can generally buy an extended warranty at any time during the vehicle’s life, as long as the car does not have exceptionally high mileage.

About the only reason you want to buy right then is to ensure that the seller gets his commission. What the false sense of urgency does is prevent you from thoroughly evaluating the offer being presented and exploring alternatives.