Greater Choice in Extended Auto Warranties Now Available to Drivers
As the complexity of modern automobiles increases, and the likelihood and cost of having to repair them increase as well, more people are opting for extended warranties before they roll off the dealer’s lot. There is debate over whether these warranties are worth it.
Basic warranties provided by the manufacturer, which are included in the price of the car, have improved significantly in recent years. And many things that go wrong with cars in the later years are attributable to wear and not likely to be covered by an extended warranty.
Still, the cost of fixing today’s complex automobiles can be steep, and for a person who is dependent on his or her car for job or family responsibilities, extra protection against catastrophic car-care costs may be worth paying the $200- to $1,000-plus that such coverage costs. Warranties vary dramatically, not only in cost but also in terms and coverage. And because they are often sold in the last stages of a car-sale transaction, buyers may believe that they must take the one the dealer offers or nothing. Not true.
Some lenders offer competing warranties. And now Geico Inc., the big auto and home insurer, has jumped into this market with two new policies covering repairs.
“Our big thing is, there is an alternative all of a sudden,” said John J. Zinno of Geico.
As a result of the additional competition and the improvement in basic warranties, “there is tremendous pressure on the after-market warranties,” said Ron Tonkin, who owns 10 dealerships in the Portland, Ore., area and is president of the National Assn. of Automobile Dealers.
For the consumer, the key to getting the best deal is understanding what’s what and who’s who.
To begin with, look carefully at what you get with the car.
Manufacturers offer both basic and limited warranties at no charge. Basic warranties usually are more comprehensive and run for a shorter time. Limited ones cover specific components, such as the drive train, and may last many years. Commonly, an auto maker will offer a combination, so that the buyer is protected for everything except normal wear items for a while, and then for several more years on major components.
However, some such warranties have deductibles, which can add up if you have multiple problems with the car. Some have definitions of normal wear that may leave important items uncovered. After you are familiar with the manufacturer’s warranty, begin comparing extended coverage. First, there is a distinction between a warranty, which most dealers sell, and insurance, which Geico sells. Geico stresses that it must file its rates with state insurance regulators and that it sells directly to the customer, “knocking out the middle man,” as Zinno put it.
Warranties are sold by warranty companies, which may or may not be affiliated with the car manufacturer. Though regulation of warranty companies is increasing, it is generally less than that for insurance companies. The warranty companies may market their policies through lenders or other outlets, but most commonly they are sold through car dealers. The dealer and the company agree on a price for the coverage, then the dealer marks it up as he sees fit when selling it to the car buyer.
These markups tend to be whatever the traffic will bear. Geico claims its customers report savings of 30% to 50% when comparing Geico’s mechanical-breakdown policy premiums to dealer warranty prices. And when a subsidiary of the National Assn. of Federal Credit Unions arranged to offer car warranties to member credit unions, it found it could cut prices by similar amounts, an official said.
NADA’s Tonkin said most dealers add about 25%, “but in some cases you see examples of small margins and sometimes you see dealers who have doubled the cost.” Tomkin emphasized that “there is nothing wrong with taking a fair markup,” but he urged buyers to check the price being offered. The consumer, he said, can ask to see the price the dealer paid, and if the dealer is not forthcoming, can get the name of the warranty company and call it and at least get the recommended retail price.
Tomkin compared the sale of extended warranties to undercoating, for which one dealer may charge $250 and another $75. “You know $75 or $100 is a very fair price,” he said, “but when you get far over that you’re getting into an area that is quite suspect.”
A second important question with a warranty is the identity of the company offering it. There are many well-established, well-capitalized companies offering warranties. Ford Motor Co., for example, owns its own warranty company that offers coverage through Ford and Lincoln-Mercury dealers, though these dealers may do business with others if they wish. But there also are some small, poorly run companies that could fold and leave you high and dry. Such companies are a problem for dealers as well because they may be unable to pay the dealer for warranty work done for consumers.
Next, understand what is covered. This isn’t easy and requires a lot of reading, but it is worth it. And check not only for coverage but interpretations. Geico’s Zinno said he has heard of warranties that don’t cover seals and gaskets and interpet this restriction to mean that if a transmission seal goes, the fluid leaks out and the transmission is ruined, it isn’t covered. “You’ve got to understand what you’re buying,” he said.
Then there is portability. Most warranties are honored by other dealers of the same car brand, but be sure you understand any limits. Ford’s Extended Service Plan warranties, for example, are honored at participating dealers, “but that’s virtually all of our dealers,” said Ford spokesman Chuck Snearly.
Geico, in its mechanical-breakdown coverage, allows the policyholder to get the work done at any licensed repair shop, Zinno said. Finally, weigh the cost of the coverage against what you could afford to pay for repairs. Rather than pay $500 or $700, you might consider simply putting that money aside in a savings account or some other fairly liquid investment, and “self-insuring.” If nothing breaks, you keep the money. If something does, pay for it out of the account and take the risk that it won’t exceed the balance. Or you can lay off some of the risk and retain some.
Geico offers, in addition to its mechanical-breakdown policy, “multi-risk” protection that covers--along with collision and comprehensive--mechanical failure of major systems. This coverage can be added to Geico’s standard auto policy for a modest additional premium--typically $30 to $40 a year, Zinno said--but with a $250 deductible. With that sort of combination package, you can protect yourself against true disaster for less cost by bearing a chunk of the risk yourself.
