Should you buy a new-car extended warranty?

You're feeling really good that you just negotiated a low price on your new car when the salesman ushers you to the finance and insurance office. Be careful. This is where you could give away all the savings you just achieved.

The salesman in the F&I office, as it's known, will pitch you on buying an extended warranty at $1,000 or more to cover repair expenses after your new car warranty expires. Just say no.

Any extended warranty won't go into effect until your factory warranty has expired -- usually three years. And the extended warranty won't cover items excluded by your original coverage.  

A Consumer Reports survey of its readers showed that 55 percent of people who bought extended warranties never used them. And those who did use them got reimbursed an average of $837 for necessary repairs vs. the average of over $1,200 paid for the extended warranty.

In recent years, regular warranties attached to new cars have improved significantly. In place of the traditional three years or 36,000 miles of bumper-to-bumper coverage, some luxury brands have now extended that to four years or 50,0000 miles.

And many warranties now cover engine, transmission and other powertrain components much longer. General Motors (GM) and Chrysler (FCAU) brands now offer five-year, 100,000-mile powertrain coverage, Ford (F) offers five-year, 60,000-mile coverage, and other companies are in a similar range. 

Korean automaker Hyundai, which initially had a poor reputation for reliability, started the competition in the late 1990s by instituting a 10-year, 100,000-mile powertrain warranty. Despite dramatic gains in reliability, Hyundai and its corporate sibling Kia maintain (and advertise) that long warranty.

In addition to resisting the pitch for an extended warranty, you can take the following steps to avoid getting stuck with a budget-busting major car repair bill.

  • Pick a reliable brand. Buying a car with a record of low repair frequency means you may not have to use your regular warranty, let alone need an extended warranty. In the most recent Consumer Reports ranking of brands for reliability, Audi, Subaru, Lexus, Porsche and BMW topped the list. Mazda, Buick, Toyota, Kia and Honda rounded out the top 10,
  • Plan for maintenance costs. Most basic warranties exclude regular maintenance items such as oil changes, windshield wipers and brakes. So budget for those items, which are almost certain to be needed. Some luxury brands -- including Cadillac, Lincoln, Jaguar and BMW -- now avoid this issue by providing free maintenance for the early years of ownership.
  • Put some savings aside for a repair bill that may not be covered. Consumer Reports suggests taking the $1,200 you might have spent on an extended warranty and putting it into an interest-bearing savings account. If a major repair issue occurs after your original warranty is expired, you'll have some cushion toward paying for it. 
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    Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. The former car columnist for Money magazine and Washington correspondent for Business Week, Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.