How to Tell If a Car Service Plan Is Worth It


Considering the purchase of an extended warranty for a vehicle can lead to serious mockery from the frugal. Everyone knows that dealerships tack large markups to these policies, extracting hundreds of extra dollars from customers. Consumer Reports warns that more than half of people who buy an extended warranty never use it, and even the minority that do use it end up, on average, spending more on the warranty than they save on repairs.

But suppose you are able to purchase a warranty at a low markup over the dealer's wholesale price? Should you buy a warranty if it's a great deal?

I recently found myself in this position after getting offered a price on a Toyota Extra Care Vehicle Service Agreement so low that a friend who worked at a different dealership urged me to snap it up. But still, I worried. Because even at a good price, coverage that I never used would still be money down the drain.

I wished for a crystal ball that would tell me whether the used car I was buying — a late model Highlander Hybrid — would ever need the services covered by this plan. Seeing the future is impossible, of course. But with some digging, I found resources that helped me make an educated guess by answering the following questions.

How Long Would the Warranty Cover My Car?

The dealer was offering me an eight-year, 100,000-mile warranty, which sounded like a lot of coverage. But when I looked closer, I realized that the mileage limit was based on the odometer's mileage, not the miles I drove. Since the car already had about 60,000 miles on it, that meant this warranty would cover 40,000 miles of my driving. And since the certified preowned car came with a free one-year warranty, the VSA, if I bought it, it would kick in on year two. Assuming that the car would hit 100,000 miles after four years of driving, this meant that the supposed eight-year policy would really cover me for about three years. I used this information to calculate the cost per year.

If you're not sure if a vehicle you're buying is already covered by a warranty, you can check by calling a dealership of that brand, or by getting a VIN-based report from CarFax or CarMD.

What Is the Rate for the Car I'm Buying?

When buying a VSA, it's like betting against the company that your car will break down. Of course, the carmaker and dealership know more about the car's reliability record than you do, so it's a bet that's stacked against you. However, it would help to know how likely it is that you'll need to repair your car during the warranty period, and fortunately, that information is available.

One step you can take is to consult the reliability rating of your car's make and model on My particular car got high marks in this area, which was a strike against buying the warranty. In surveys, Consumer Reports has found that owners of more reliable vehicle makes tend to be less satisfied with their purchases of warranty plans.

You can get more specific by ordering a Vehicle History and Title Report from CarMD, a company that sells a diagnostic tool that plugs into the car to tell you why the check engine light is on. You can order a report by typing the VIN into CarMD's site, and in addition to useful information about the car's history, CarMD will draw upon its large database to tell you whether a check-engine light repair is expected within the next year. CarMD showed me a report for a car with the same make, model, and mileage as the one I was buying, and the report indicated that no such repair was expected in the next 12 months.

That was another strike against buying the VSA.

What repairs can cause that light to go on? About 85% of the systems in the car, says CarMD spokeswoman Kristin Brocoff.

"It's not just a handful of parts. The car's check engine light can alert you to anything as small as a loose gas cap and serious as engine failure," she said.

What Are Car Repairs Likely to Cost Me?

CarMD can help answer this question too, using data from repair shops nationwide. The vehicle history includes a five-year cost of ownership estimate, which includes fuel, maintenance, repairs, insurance, and depreciation. For my vehicle of choice, Brocoff broke down the $50,433 cost listed on the report, and revealed that repairs over the next five years are expected to run $1,689.18, or $337.80 per year. This was more than the per-year price of my warranty, so, if all those expected repairs were covered by the warranty I was offered, maybe I would come out ahead by buying the warranty.

Another way CarMD can help you predict your car's future is its regularly updated Vehicle Health Index reports, which are free dispatches on the cost and incidence of repairs for all cars. For instance, the 2016 VHI says that the typical "check engine light" repair in my region, the West, costs $403.42. Knowing that, I know I would have to get hit with at least two such repairs that were covered by my warranty to make the coverage pay off.

Will the Warranty Even Cover the Expected Repairs?

Up until this point, things have looked good for buying the warranty, because the data predicts that I'd spend a few hundred dollars a year on car repairs. But this is where things get head-scratchy. Some potential repairs would be covered by two other warranties that would come free with my car, and those that aren't might not be covered by the VSA, either.

Like many certified used vehicles, my car came with a limited powertrain warranty, which covers "major engine, transmission components, and all internally lubricated parts," up until my odometer hits 100,000 miles, i.e., for about the same amount of time as the VSA they want to sell me. Because it's a hybrid, Toyota is required by law to also provide a warranty for the hybrid battery, covering about the same period. So, only repairs that don't involve the powertrain or the hybrid battery could potentially be covered by the VSA. Then, of course, the VSA has a specific list of components it covers, and anything not listed there would cost me out of pocket.

How do you know what parts are most likely to break? Again, I got help from CarMD's 2016 Vehicle Health Index, which told me that the most common check-engine-related repair for all cars was replacing the oxygen sensor (average cost $250), followed closely by replacing the catalytic converter ($1,153!), and replacing ignition coils and spark plugs ($390 for both). Searching for these repairs on the list of items covered by Toyota's powertrain warranty and the Toyota Extra Care Platinum VSA, I found the O2 sensor listed on neither, the catalytic converter and ignition coils listed on the VSA, and spark plugs listed on neither. The high cost and high ranking of catalytic converter replacement was definitely a point for buying the warranty; then again, even at the second most likely repair, this job only accounted for about 7% of all car repairs. And despite all the data I'd read, I could not really predict how likely it was that my car would need a new catalytic converter during the warranty coverage.

After investing multiple hours researching the likelihood of needing the offered VSA, I came to the frustrating conclusion that buying it or not buying it was basically a toss up.

My educated guess based on my research is that my car may need one or two of the smaller covered repairs during the coverage period, but that the out-of-pocket cost would be close to what I paid for the warranty. On the other hand, reading CarMD's reports made me feel more secure that the odds of a really expensive repair hitting me in the next few years was probably not very high.

One actionable thing I learned from this experience is that if you opt to buy a VSA, you should absolutely not pay the first price offered by the dealership. My dealership's finance guy first offered me the plan at twice the price he eventually ended up offering it at. All it took to cut the price in half was telling him that I didn't want to buy it.

Have you purchased a similar warranty on your vehicle? Share your experience with us!

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Guest's picture

I bought the 5 year/75k extended warranty with Hyundai and I more or less broke even. I did need the O2 sensor replaced and a couple hundred repairs here and there. Luckily, around 70,000 miles, I needed two power window motors replaced, which was what brought me into positive territory.

My other warranty experience was with Dodge. That one very much paid off since that car needed repairs worth a couple thousand more than the warranty cost.

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