For many of us, our car is either our second most expensive possession (after a home) or it is the priciest thing we own. We are dependent on our automobiles to enable the many activities of our life, and it is an essential, ongoing expense to keep them running, due to gasoline, operating maintenance and repair costs, and paying for related government registration and taxes.
An accident or a major breakdown for a vital part of a car (such as the engine or transmission) is not only disruptive to our life; it may also result in a high repair bill that could disastrously affect our finances. For new or almost new cars, owners may be able to have non-accident repair costs covered under the warranty. Many new vehicles have three-year/36,000-mile extensive warranties that cover the cost of most major components, but some manufacturers will extend the coverage time and mileage. For example, one Korean car maker has long offered a 10-year/100,000-mile powertrain limited warranty that covers the repairs or replacement of selected engine and transmission/transaxle components—which are usually the most expensive parts of the car.
But what do you do after the warranty runs out? It’s a common saying that parts and systems start breaking down soon after a warranty ends, and while this may not be completely accurate, it’s not unusual to know someone who has been burdened by a seemingly endless cycle of car breakdowns and repairs, costing not only money, but lost time at work and home.
If you’re concerned about being able to pay for future repairs for your aging car, there are several options you may want to research and then decide if they’re appropriate for you. We’ll touch briefly on two that are worth looking into more deeply: extended warranties and GAP protection.
Extended Warranties
An extended warranty (or more accurately, a vehicle service contract) protects against a number of (but not usually all) costly repairs in the event of a mechanical or electrical failure of your vehicle. The warranty is usually purchased to replace the manufacturer’s warranty, which runs for a limited number of years. Be aware that the extended warranty does not cover routine vehicle maintenance; it focuses on repairs due to breakdowns. The warranty is an additional cost that may consist of both an upfront payment and then ongoing payments, which could be rolled into the cost of a car loan. Also consider that most extended warranties are available for a limited amount of time, usually within a range of three to ten years.
Besides covering the cost of the repair, an extended warranty may include some or all of these common features below; you should review and compare individual warranty offerings thoroughly. Note that this is a summary and not a comprehensive list of everything that may make up an extended warranty:
- Deductibles that must be met before the coverage becomes effective
- 24-hour emergency assistance and towing
- Rental car allowance
- The warranty may be accepted by many (but not all) car dealerships and Automotive Service Excellence (ASE) certified mechanics
- Customizable coverage plans
- A variety of payment options
- 30-day money-back guarantee
Bridging the GAP
While extended warranties for mechanical breakdown protection can be useful for all cars, car owners may want to look into adding another type of specialized coverage to protect their automotive investment.Guaranteed Asset Protection (GAP or “gap”) coverage will generally pay the difference between the estimated cash value of the car (which you’ll receive from your insurance company based on industry valuation data) and the amount you still have to pay on your car loan—the financial gap. A gap policy can be a huge help if your car is a complete loss due to an accident or is stolen and isn’t recovered; it’s an additional level of protection. Note that there are also other types of protection for loans.
As soon as you buy a new car it starts losing its value; what you paid the seller for the car is no longer what the car is worth. If you have an accident and get the full amount of the insurance payout from your collision coverage, that amount may not be enough to exactly replace the vehicle you lost. Gap protection bridges that cost difference and can help you get back the year model of the car you originally purchased. While gap protection may be added at any time, new (or newer) cars with higher residual value may benefit a bit more from it. Gap coverage is available from car dealers, financial institutions and most car insurers. As with extended warranties, you should compare coverage features from a variety of providers—including insurance companies, financial institutions, and car dealerships—and to discover what policy is the best fit for you and your car.
Consider Your Options
A car is a big investment and an ongoing cost, but it is usually a necessity for our lives. If you want to manage the costs of your automotive care, do your homework—research the pros and cons, ask questions at dealerships and garages, and talk to your financial institution. An extended warranty and gap protection may be appropriate for you, but be certain to make that decision after gathering both a variety of facts and a range of opinions.
