Extended warranties can be great investments for vehicle protection, as they provide peace of mind against mechanical breakdowns. Though vehicle service contracts can be helpful for drivers, it’s not quite as obvious what makes them beneficial to their providers. We’ll answer the question of, “What are the economics of extended car warranties?”

Read on for answers to some of the most common questions about the economics behind extended car warranties. You’ll also learn how much an extended warranty generally costs and whether you should consider purchasing one, plus get an overview of some of our research team’s picks for the best extended car warranty providers.

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What To Know About The Extended Car Warranty Business

To determine what the economics of extended car warranties are, you’ve got to look at the seller and how much they invest in vehicle protection services. Warranty providers know car owners want to save on mechanical repair costs, as it can be expensive to pay for labor and parts out of pocket.

Actuaries assess consumer data to find the most frequent repairs, average labor costs, and how much consumers will pay for coverage. Extended car warranty companies then consider how much they’re willing to pay out, and they usually work with vehicle service contract administrators to process motorists’ claims.

How Profitable Are Extended Car Warranties?

Extended car warranties have a large market globally, as they generated over $120 billion in sales in 2019 alone. On top of that, the industry for vehicle protection plans is expected to reach over $169 billion within the next seven years, marking a significant 7.4 percent increase.

The extended auto warranty industry might face a decline in revenue during the coronavirus pandemic since new car sales dropped drastically in 2020. A huge uptick in demand is expected once the economy fully recovers, though.

Do Car Dealers Make Money On Warranties?

When it comes to the economics of extended car warranties from car dealers, the dealers usually have profit margins of up to $1,000 from each sale. Extended warranties can be huge profit makers for dealerships because up to half the cost of the warranty usually goes straight into their pockets. That’s why nearly every automaker, from Ford and Honda to Toyota and BMW, seems to offer extended car warranties.

How Much Should An Extended Warranty Cost?

The average extended car warranty cost is $1,000 to $3,000, but pricing depends on your chosen level of coverage, your deductible amount, and the following information about your vehicle:

  • Age
  • Make
  • Model
  • Mileage
  • Preexisting conditions

An extended warranty that costs between $3,000 and $4,000 is on the high end but may be worth it. If your car seems to always be in the repair shop, an extended warranty plan could save you significant time, money, and hassle.

Car warranties don’t cover these items:

  • Environmental damages
  • Wear-and-tear components
  • Issues caused by theft or vandalism
  • Routine maintenance needs such as oil changes

Read your contract’s fine print to figure out exactly what’s covered and what’s not. Regardless, drivers with older or unreliable vehicles could save money by protecting their cars using extended warranties.

Do You Really Need An Extended Car Warranty?

If you plan to keep your vehicle for at least four or five more years, then the economics of investing in an extended warranty will probably work in your favor. If you have a new car rather than a used vehicle, you might not need an extended warranty yet. But you should keep one in mind for when your factory warranty expires.

Owners of unreliable vehicles and ones with faulty equipment will likely understand the personal economics of extended car warranties. For a low monthly payment, cars receive protection against certain unexpected and often expensive mechanical breakdowns.

There are two main types of extended auto warranties you can expect to choose from: bumper-to-bumper coverage and powertrain plans. Below, we’ll explain a bit about each.

  • Bumper-to-bumper: Comparable to a manufacturer’s warranty, this plan covers most vehicle components and systems with a small list of exclusions.
  • Powertrain: This option covers only the most critical components of your car, such as its engine, transmission, drivetrain, and driveshaft.

Nearly every extended warranty provider offers either powertrain or bumper-to-bumper coverage, but it’ll be up to you to decide the economics of extended car warranty plans with basic versus comprehensive coverage.

Recommendations for Extended Car Warranty Companies

If your original warranty is set to expire and you need to extend your coverage, there are a few third-party warranties to consider. After reviewing the industry’s most reputable extended car warranty companies, we found that Olive, Endurance, and CARCHEX are solid choices.

Olive: Best Online Warranty

Olive offers three extended auto protection plans that cover vehicles for up to three years and up to a limit of 185,000 miles. As drivers pay only a monthly subscription charge for coverage, Olive offers a low-obligation and affordable option for extended warranties.

Olive car warranty reviews praise its modern and digital approach to car warranty coverage. The company offers online instant quotes, and there’s no waiting period before you can file a claim and no need for inspections before coverage begins.

Endurance: Best Coverage

Positive Endurance warranty reviews and the company’s gold-level certification from the Vehicle Protection Association make it one of our top picks for extended warranty coverage. It’s also a direct provider, meaning the company manages its own vehicle service contracts and claims.

With six levels of coverage, you’ll have options to receive exactly the plan you desire. You’ll also gain a free year of Endurance Elite Benefits, giving you access to perks such as tire repair or replacement.

CARCHEX: Best For Used Cars

As one of the country’s largest extended warranty providers, CARCHEX provides five levels of vehicle service contracts. CARCHEX reviews show it’s highly respected across the industry, as seen by its A+ rating and accreditation by the Better Business Bureau (BBB).

CARCHEX plans include benefits such as towing and gas delivery services along with rental car reimbursement. Thanks to its reputation, CARCHEX maintains automotive partnerships with Kelley Blue Book, CARFAX, and RepairPal.

FAQ: What Are The Economics Of Extended Car Warranties?

Methodology

In an effort to provide accurate and unbiased information to consumers, our expert review team collects data from dozens of extended auto warranty companies to formulate rankings of the best providers. Companies receive a score in each of the following categories, as well as an overall weighted score out of 5.0 stars.

  • Industry Standing: Warranty providers with a history of strong business practices and endorsements from experts receive the highest scores in this category.
  • Coverage: This rating is based on types of extended warranty plans available, coverage terms, and added benefits like roadside assistance.
  • Cost: Our research team reviews sample quotes for a variety of plans and vehicles. Companies with lower prices per year of coverage receive the best scores.
  • Transparency: This score takes into account contract transparency and the availability of a money-back guarantee.
  • Customer Service: We comb through customer reviews and perform our own shopper analysis to get a sense of the responsiveness and helpfulness of each warranty company.