How to Buy the Best Car Warranty for You

Car repairs are expensive, and 61 percent of Americans simply can't handle a $1,000 repair bill without going into debt, whether that means putting it on a credit card, taking out a loan or parking the car. That makes extended service agreements, also known as extended warranties, really attractive.

But extended warranties aren't all the same, and often, consumers fall for scams or buy a plan that doesn't wind up covering what the buyer thinks it covers, thus wasting their hard-earned money. Many of us have heard the horror stories, which prevent some consumers from buying a plan that could actually really benefit them in the long run.

When it comes to extended car warranties, you just have to go into the purchasing process well informed. Here's what you need to know.

Who should get an extended warranty?

Before you start looking for an extended warranty or buy one from the dealership, you need to consider whether an extended warranty is the right fit for your specific needs. Extended warranties can be helpful, but a full 55 percent of people who buy an extended warranty don't use it even once, making careful consideration important.

"Car decisions should be made based on ownership timeline," says Kathleen Long, vice president of growth at RepairPal, who has spent years working with extended warranty companies.

Extended warranties only kick in after your initial manufacturer's warranty no longer covers your car. If you only plan to keep your car for a few years, and you are buying it new, your extended warranty might only be in effect for a short amount of time. In this case, it won't make much, if any, impact.

This is especially true for cars that are leased and typically turned in at the same time that the comprehensive manufacturer's warranty runs out, making an extended warranty unnecessary.

Extended warranties are designed to cover mechanical failures so you don't have to dip into your savings to cover the costs. If you have enough money to cover a major repair or are excellent at budgeting, you might not necessarily need or want an extended warranty.

For instance, if you can afford to—and actually do—put aside $70 per month for the first three years after you buy a car, you'll have $2520 in your savings account when your initial manufacturer's warranty runs out. That's around the same amount you would have paid for the extended warranty if you had purchased it. That money will be enough to cover a few major repairs, essentially making you self-insured. Every time you use a chunk of this money, you can start saving $70 a month until you've replenished your savings.

Another consideration is the reliability of the car you are purchasing. If you, for example, are buying a Honda HRV, an extended warranty might not be the right choice for you, since annual repairs average only $301. On the other hand, if you are buying a Land Rover Range Rover Evoque—which has an average annual repair cost of $1,102—an extended warranty is certainly a very reasonable solution. You can find the average annual repairs costs for a car that you are considering purchasing using RepairPal's reliability tool.

As mentioned earlier, most Americans don't have the funds to cover a $1,000 repair. You might be in that group, or you might simply not be as good at budgeting as you like. In that case, an extended warranty might be an excellent fit for your needs. You'll be able to get your car fixed, without having to put the cost on a credit card, borrow money, or drive around a car that isn't safe.

What to look for in a good extended warranty

There are a lot of extended warranties out there that aren't very good at all, and it's easy to fall for a scam or just simply buy a warranty that doesn't cover what you expect it to cover. Before you start shopping, it's important to understand what is and isn't worth your money. Read about extended warranty scams here.

Look for a policy that offers the following:

Exclusionary

An exclusionary policy includes a list of parts that aren't covered, and everything not listed is included in the coverage. "Avoid inclusionary policies of all kinds; those cover specific components on the car and only those components, and it is not worth paying upfront for any of those," says Long.

Choice of repair shop

Some policies limit the shops where you can get your car fixed. You want to purchase an extended warranty that allows you to fix your car at a mechanic that you can vet and trust. That said, having a network of repair shops that have experience dealing with the particular extended warranty is helpful.

Full rate payment

Some extended warranties cap how much they will pay for parts and labor, sticking you with the balance of the bill. Look for a policy that covers the rates your mechanic charges.

A good reputation

Some simple googling, or asking your friends and family for referrals, can help you narrow down which policies provide excellent customer service, and which jack you around and don't pay for repairs.

Direct pay

It can be endlessly frustrating to find out that yes, your warranty will cover repairs, but first you have to pay the bill and wait to get reimbursed at a later date. Policies that offer direct payment to your mechanic are the best options.

There are other benefits that some extended warranties offer, such as roadside assistance, rental car coverage while your car is in the shop, and locksmith services. If these benefits are important, be sure to ask the extended warranty representative or read over the policy carefully to ensure those are included. If you do decide to buy, considering only the top available coverage is your best bet, as lower-level policies aren't usually worth the money.

Mechanical Breakdown Coverage

"If I were buying a new or newer car, I would likely acquire mechanical breakdown insurance," says Long. "It's a high-quality product backed by a reputable insurance company."

Select insurance companies, such as Geico, offer mechanical breakdown coverage, an insurance policy that covers mechanical breakdowns not related to car accidents or natural disasters such as hail storms or flooding; these policies are an alternative to an extended warranty.

There are some key differences between a traditional extended warranty and a mechanical breakdown insurance policy, though. An extended warranty gets paid either in a lump sum or in payments until you've paid it off. A mechanical breakdown policy starts as soon as you buy a new car and continues until you no longer want coverage—or until the insurance company can no longer cover you (usually at the 100,000-mile mark). Plus, deductibles are also usually higher, around $250 instead of at low as $50, which is available for extended warranties.

That said, mechanical breakdown coverage is also limited to new cars, or cars that are less than one year old or with less than 12,000 miles on them. As older cars aren't able to be covered, it limits who these policies benefit. Another difference to note is that since the mechanical breakdown coverage can't be started on an older car, you'll be paying for the first three years while your car is still under the manufacturer's warranty, overlapping coverage.

Companies Worth Looking Into

Sure, you can buy an extended warranty at the dealership when buying a car, but that isn't your only option—not even close. In fact, many dealerships don't offer their own extended warranty policy at all but actually sell a "white label" product, from one of the major insurance companies. If you are at the dealership and want to finance one of their extended warranty options, be sure to ask about who administers the warranty.

If, on the other hand, you want to buy an extended warranty later on, or are looking for a warranty on a car you bought privately, you will likely start digging through dozens of company options, some of which are different names for the same companies, making things even trickier. But there are some great companies if you know where to look.

"Some particularly good ones include those offered by Omega, Endurance, Olive, and 1-800-WARRANTY," says Long. Some credit unions also offer extended warranties, like Forever Car, a subscription-based option.

Some extended warranties, including the ones listed, offer a monthly payment option. Before you move forward, be sure to compare the difference in cost between the flat fee and payment-based models. Endurance, the extended warranty I purchased, charged a whole $1,000 more for the timed payment option. Once I found that out, I paid for the policy upfront.

Buyer's Remorse

Here's the kicker to all of this: Let's say you buy an extended warranty, understanding what it should and shouldn't cover, but the first time you go to use it, you find out that it's not quite as straightforward as you thought it was. The good news is that most reputable extended warranties allow for a prorated refund. Give the company a call to cancel your warranty, and you can expect a check—although it might take a while (30 days or more).