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Car Warranty vs Car Insurance: What’s the Difference?

Fran
Dani Milton February 22, 2019

Every day, car warranty manufacturers air alluring commercials promising to cover for your vehicle in case it breaks down. They claim they will cover repairs and other expenses when you have a mechanical breakdown, but is this true? And if you have a car warranty, does this mean you don't need to have insurance coverage?

Let's discuss the difference between car warranties and insurance products.

What Is a Car Warranty?

A car warranty is a vehicle service contract. Under this agreement, a provider covers the repair or replacement costs of parts within your vehicle when it breaks down.

An auto warranty provides peace of mind since it offsets any repair costs during the contract period. Many brand new cars come with a manufacturer's factory warranty, which covers the first three years of a vehicle (around 36,000 miles) to ten years (or 100,000 miles). Powertrain warranties can last up to 60 months or 60,000 miles.

Some manufacturers may also offer extended warranties for a certified new or used car. Read documentation from the warranty provider before you sign up to find out what's included in the contract.

A few manufacturers offer roadside assistance as part of their new car warranty. It will cover the cost to transport your car to a dealership for repairs. You can also receive emergency fuel and tire changes if you run into trouble on the road.

What Are Extended Warranties?

Once your original factory warranty expires, you'll have the option to purchase an extended warranty. This vehicle service contract can overlap with the manufacturer's warranty but usually begin when the manufacturer's warranty ends. These are also called "aftermarket warranties."

Manufacturers offer vehicle service contracts in two coverage options: original manufacturers and aftermarket warranties.

  • Original Equipment Manufacturers Warranty (OEM) – Under this agreement, the original manufacturer offers repairs using only using the manufacturer's parts to repair the vehicle.

  • Aftermarket Warranties – these are sold by third-party or car warranty companies.

Some carmakers now offer 10-year powertrain warranties to customers and vehicle service contracts for older vehicles. These usually cover the car's engine and transmission.

Most warranties don't cover parts that usually wear out on certified used or new vehicles, such as tires, brake pads and wiper blades.

What Do Car Warranties and Extended Warranties Cover?

Depending on the auto, these vehicle service contracts pay for damages for covered parts when they break down. Whenever your need car repairs, you can file a claim with the extended warranty company. The company will investigate your claim. If they approve it, they will pay the mechanic for the repairs.

Each manufacturer warranty has restrictions regarding payments. Every time you use the service, you'll have to pay a service fee.

Car warranties don't cover routine maintenance like oil changes, car tune-ups, replacing brake pads and fluid refills. They also don't cover accident-related damages covered by car insurance.

The Federal Trade Commission recommends that owners receive routine maintenance on their cars at the required time. It will ensure their car warranty manufacturer will cover their vehicle.

How Much Does a Vehicle Service Contract Cost?

Coverage for extended warranties varies depending on your plan and your vehicle's make and model.

These vehicle service contracts range in cost from $1,000 to $3,000 or more. These costs depend on the company that issues the auto warranty, and the vehicle covered under the contract. All of these will determine the final cost of the car warranty.

Some plans also require you to pay a deductible, which a provider may charge either per covered repair or per car warranty visit. When searching for a plan, ask the provider how the deductibles work. You may end up paying multiple deductibles if the issue isn't repaired in a single visit to your mechanic.

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What Else Does the Manufacturer Warranty Cover?

Like the corrosion warranty mentioned above, some things are covered by manufacturer warranties but the average consumer doesn't know about these other car warranties exist unless they ask. These quietly protective warranties are sometimes called "policy adjustments" or "goodwill services."

Always call the manufacturer whenever something breaks down. You never know when one of these vehicle service contracts will apply. Sometimes, all it took was buying the car without any additional expenses to be covered. Asking never hurts.

What Types of Extended Warranties Are Available on the Market?

There are several types of extended car warranties available on the market. Here are the following coverage options:

  • Bumper-to-Bumper Extended Car Warranty. This covers air conditioning, stereo, vehicle sensors, fuel systems and electrical components in the vehicle. These warranties usually cover regular maintenance, like fluid changes. Another name for this coverage is an exclusionary warranty or a new vehicle warranty.

  • Powertrain Warranty. This service contract covers the engine and transmission. It also pays for any parts that are connected to the wheels, like the driveshaft. Powertrain warranties often include seat belts and airbags. These don't include regular maintenance, like tire rotations.

  • Drivetrain Warranty. It covers transmission, driveshaft, wheels and axle. This auto warranty does not cover the engine.

  • Car Maintenance Warranty. This contract covers service for air filters, oil changes, tune-ups and similar parts. Sometimes, dealerships include car maintenance warranties when someone purchases a new car. They can be e bought at dealerships as a vehicle service contract.

  • Performance Warranty. If your car fails an emissions test, this extended car warranty will cover repairs or adjustments for at least two years or 24,000 miles.

  • Design and Defect Warranty. This auto warranty covers two years or 24,000 miles if the emission controls fail without testing.

  • Factory Accessories Warranty. This extended car warranty helps pay for repairs to audio systems, engine modifications and all sorts of custom additions. Make sure to notify the warranty company if you've modified any accessories after they were installed.

  • Wear-and-Tear Plans. With this coverage, your interior, upholstery and paint are covered. Usually, deep cleanings are covered with this protection too.

  • Corrosion/Rust Warranty. This service contract cover damage due to rust or deterioration of metals are covered with this, but some manufacturers provide lifetime protection so you may not need it.

What Is the Difference Between an Extended Car Warranty and an Auto Insurance Policy?

There are key differences between a vehicle service contract and car insurance. Warranties cover maintenance and breakdowns, which car insurance usually does not cover (unless you buy mechanical breakdown insurance). Car insurance is intended to cover losses and damages that result from a collision, accident or several other specific perils, like theft and vandalism.

States usually mandate auto insurance before you can legally drive on the roads. A warranty is never required by law. Also, auto insurance doesn't just cover your car when it breaks down. It pays for the following:

  • Liability coverage pays for another driver's damages. Bodily injury liability pays for the person's medical expenses when you are at fault for an accident. Property damage liability covers another driver's vehicle damages when you cause an accident.

A lender may require you to get collision and comprehensive coverage if you've leased or financed a car.

  • Collision coverage pays for damages to your car that resulted from a collision with another vehicle or object. It pays for repairs to your vehicle. You choose your deductible amount when you first purchase your insurance (usually $250, $500 or $$1000). Despite popular belief, it's not always wise to buy collision coverage. For instance, if your car is worth less than what you pay in coverage (you only get paid the Kelley Blue Book value of a car).

  • Comprehensive insurance pays to repair or replace your vehicle when it's damaged by non-collision events like cracked windshields, natural disasters, fire, theft, vandalism, hitting an animal, or falling objects. Just like with collision coverage (above), you have to pay a deductible first before your coverage pays for the rest of the loss. 

Some states legally require you to carry additional coverages like Medical Payments (MedPay) and Personal Injury Protection (PIP).

  • Medical Payments – This pays for health care expenses for drivers.

  • Personal Injury Protection – It covers your medical expenses, regardless of who is at fault.

States that require you to carry this no-fault coverage include Kansas, Kentucky, Florida, Hawaii, Massachusetts, Michigan, Minnesota, New Jersey, New York, Pennsylvania, Utah and North Dakota. Puerto Rico is also a no-fault territory.

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What if I Don't Have Car Insurance?

When you don't carry the state's required minimum coverage, you're not only liable for damages if you're at fault for an accident but you can also face fines and legal charges.

Law enforcement will also charge you with a traffic infraction or misdemeanor. You could pay thousands in fines or spend time in jail, plus probation. Some states will also require you to sign up for an SR22, a certificate that proves you have the necessary insurance coverage, regardless of whether you own a vehicle.

You can only purchase car insurance through a reputable insurance company. If you're searching for a new policy for your vehicle, you can use an online comparison tool like SmartFinancial to find affordable coverage. You'll get a quote from different insurance companies within your local area. After you compare options, you can select the best deal and most affordable insurance rates.

Do you Need Car Insurance if you have a Vehicle Service Contract?

Yes, you do. Most states require drivers to carry car insurance on their vehicles. Drivers must have this coverage before they can register a car or legally drive on the road. This coverage shows that you have financial responsibility. It will also pay for another person's damages if you are at fault for an accident.

Should I Buy an Extended Warranty on a Used Vehicle?

A vehicle service contract is best for newer vehicles. According to AAA, the best coverage for used vehicles is when they are under 80,000 miles. Individuals should determine how long they plan to keep their used car. They can also calculate how many miles they plan to drive each year and whether they can afford to pay for a car repair out of pocket.

Are Car Warranties Worth It?

An Extended Warranty can help you save money for expensive repairs that are no longer covered by a manufacturer's warranty. You won't have to pay an unexpected bill for mechanical breakdowns by yourself. Instead, you would only have to cover the deductible, while the warranty company covers the remaining amount.

According to Consumer Reports, 55% of warranty buyers never use the coverage; however, those who do use it are often grateful they bought it.

You could also say that statistically most people hardly ever use their car insurance too, but the ones who find themselves in car crashes are sure glad they have it. And so are the people pulled over for a driving offense. It also gave these customers peace of mind knowing that their repair costs would be covered during the service period.

What Are the Disadvantages of Car Warranties?

Car warranties have some disadvantages. One of the biggest disadvantages of vehicle service contracts was discovered through a Consumer Reports study released in 2021. Their researchers found that consumers often paid more money for an extended warranty than they received back in benefits.

  • Overlapping Coverage – For instance, your coverage period may overlap with the manufacturer's extended warranty. If this situation occurs, you won't be able to use the extended warranty until the first one expires.

  • They don't cover everything – Extended warranties won't cover every part that breaks down. Before you sign up for a contract, examine the terms to find out which replacement parts it covers.

  • Limited service options – Under these service contracts, you can't select the repair shop you want. You can only have your vehicle repaired at facilities approved by the auto warranty company.

  • Depreciation clauses – Some contracts will count in the costs of depreciation. They will only fix parts based on the mileage of the vehicle.

  • Reliability – You may have to pay for repairs if your dealer, manufacturer or warranty company is no longer in business.

  • Cost – Extended warranties can also add thousands of dollars to your car's purchase. If you pay for this upfront, you can add thousands of dollars to your monthly payment due to financing charges. You can consider skipping the warranty and setting aside the savings in case you need to fix your vehicle in the future.

How Much Does a Car Insurance Policy Cost?

A car warranty and car insurance policy have vastly different costs sometimes. An insurance policy's cost varies significantly from one driver to another and requirements differ in each state. According to a National Association of Insurance Commissioners report, the average cost to insure a car in the U.S was $815 in 2012.

Rates have risen in nearly every state since that insurance industry study. Costs have increased due to distracted driving and the rising prices in vehicles with the latest safety features.

There's never any reason for you to overpay for insurance for a used or brand new vehicle. Comparison shopping can help you save money, so you should always get multiple quotes to compare prices and coverage levels. You should also check rates every so often (every year or two at least). A reliable way to get fair rates from trustworthy agents is to visit SmartFinancial for multiple free quotes from top insurers. We'll help you select the right insurance company for your budget.

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