Extended Car Warranties & Gap Insurance

Two things are certain in life - death and taxes. Likewise there are two things that are certain when you are dealing with car sales; being offered an extended car warranty and gap insurance for your vehicle. What are these two features and are they worth the hundreds (or thousands) of dollars that the dealership is asking for them?

Extended Car Warranties

All new vehicles come with a warranty from the manufacturer to repair or replace most of the vehicle's components if they stop functioning within the first few years. Whether it be the engine or the ashtray, you can rest assured for awhile that your car's repairs will generally be taken care of free of charge. But what happens after that warranty expires? Most car warranties last for three years, some will go as high as four or five, but you may end up owning your car for ten years or more. What if the engine goes bust two days after the warranty from the manufacturer expires? Under normal circumstances that would mean that you would have to bear the cost of that repair all on your own which can cut deeply into your finances. This is the reason that extended car warranties were created.

Extended warranties can be sold for as long or as short a period as you want and they will generally provide the same types of protection that your regular manufacturer's warranty provided when it was in effect. Extended warranties do not take effect until after the other warranty has expired and, depending on the provider and how much you pay, may not provide complete levels of protection (you may have to replace the ashtray out of your own pocket, for example). Generally speaking extended warranties are not recommended by financial experts because while your chances of actually needing some level of repairs offered by one are about 100%, the cost of those repairs are not at all likely to total the price that you will pay for the warranty in the long run - especially if you roll the price of the extended warranty into the loan for your car and pay interest on it! Rather than shelling out that money for the extended warranty, the wisest and least expensive route to take is to pay yourself that money in an interest-bearing savings account or investment that is liquid enough for you to get your hands on it on short notice. You will find that this account is capable of paying for most of your car's repairs after the warranty has expired and you will reap the additional benefit of improving your credit, financial security, and saving money all at the same time.

Gap insurance

When buying a new car, in all likelihood the lender for your loan is going to insist that you carry comprehensive insurance coverage on the vehicle at all times. This is so that the lender can protect their investment from loss, but the protection is not complete. Comprehensive coverage on a vehicle is designed to allow you to make repairs on the car if it is ever involved in an accident, but what if the car is totaled? The insurance company will pay you what the car is worth not what you currently owe on the loan! If you follow the advice of financial experts (and this website), this will not likely be an issue since you had such a sizeable down payment on your vehicle, the car will be worth more than you owe on it and your loan will be satisfied by the insurance payment. However, since most people do not put down a significant enough down payment on their new car purchase, and cars depreciate in value quickly and immediately after being driven off the lot - most people are upside down in their car payments; owing $10,000 on a car that's worth $6,000 for example. So if the car is totaled in an accident, and the insurance company gives you $6,000, where does the other $4,000 come from? Either from your pocket or from gap insurance coverage which is designed for this specific purpose. Is gap insurance worth the cost? Generally it is, and especially if you pay for it up front rather than rolling the cost into your auto loan and having to pay interest on it in addition to the principal. Gap insurance prices vary wildly from one car dealership to the next, however, so if you feel you are being taken advantage of and sold high, don't be afraid to put on your walking shoes and go somewhere else to buy the gap insurance.

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