Is an Extended Car Warranty Ever Worth the Money?

The high cost of buying a car is one reason it can be so tough to decide whether to add the extra expense of an extended warranty. According to Motor1.com, the total cost of an extended warranty ranges from $2,000 to $5,000. The average annual cost is $1,330, or a little over $110 monthly. When expenses like auto insurance and car maintenance are added, it's easy to get in over your head.

If you're watching your finances closely, spending an extra $110 or so a month might seem foolish. But there are times when an extended car warranty is a good choice. Here, we'll cover when it does -- and doesn't -- make sense to spring for extended vehicle protection.

Arguments for an extended warranty

Going the extra mile to purchase an extended warranty makes sense if the following is true.

• You worry the vehicle will have problems: If you want to avoid surprise repair bills, an extended warranty can offer peace of mind.
• You'll keep the vehicle in tip-top shape: An extended warranty makes the most sense when the owner also does their part by keeping up with routine maintenance.
• You have no intention of selling the vehicle: You plan to drive it for a long time and want coverage to kick in after the manufacturer's original warranty expires.
• Your car turns out to be a bit of a lemon: Sometimes, it's only after a model is on the road for a year or two that experts notice specific problems. A warranty can be a solid investment if you learn that your model is prone to particular mechanical issues.
• You may receive extra perks: Some warranties include roadside assistance or reimbursement costs for a rental car or hotel if you're on a trip and have car issues.

Arguments against an extended warranty

You might want to think twice about paying for an extended warranty under these circumstances.

• You don't typically keep a vehicle for long: If your habit is to trade cars every few years, paying for a long-term extended warranty doesn't make much sense.
• You have a plump emergency savings account: If you routinely tuck money away in a high-yield savings account and feel confident you can afford auto repairs, you may not require a warranty.
• Your monthly car payment is straining your budget: The average monthly auto payment in the U.S. hit $760 in May. For most households, that's a heavy load to carry. If you're already worried about how you'll make your monthly payment, you may need to consider whether you can also afford to pay for a warranty.
• Exclusions and limitations may be unavoidable: Depending on where you buy the warranty, there are often limitations that make it less than ideal. For example, a plan may not kick in for 30 days or more. And if you're looking to buy a warranty at a discount, it may contain several exclusions, including components that aren't covered if they break down.
• There's no coverage for wear and tear: If you don't typically keep up with routine maintenance, it's important to note that a warranty won't cover the cost of issues arising from wear and tear damage.

What paying for an extended warranty buys you

Extended warranties are designed to help you keep your vehicle on the road longer. They come in all shapes and sizes, but most cover repair bills for your vehicle's most important components, such as its engine, transmission, and drivetrain.

These factors determine the final cost of an extended warranty:

• The provider you choose
• The level of coverage you desire
• How long you want to carry coverage
• Make and model of your vehicle
• Vehicle's age and mileage
• The size of deductible chosen

While you may not have any control over how many miles are on your vehicle, you can decide which warranty provider you want to work with and the level of coverage you desire. Keep in mind that the more coverage you sign up for, the more you'll pay for a policy.

And, like buying auto insurance, the lower the deductible you choose, the higher your premium will be. We're all looking for ways to save money, and paying less for auto insurance is one way to do it. But depending on your situation, purchasing an extended warranty may be another way to save.

Deciding on an extended warranty may ultimately come down to answering two questions:

1. Do I have enough money put away to pay for vehicle repairs?
2. Do I plan to drive this vehicle for many years?

If the answer to both questions is yes, why not budget for an extended warranty while budgeting for a new vehicle? For example, if you're putting $100 or $200 away each month to build a down payment, save an extra $25 to $50 monthly to cover the cost of an extended warranty.

Extended warranties may not be suitable for all drivers, but they can certainly come in handy when the unexpected arises.