Does it pay to get extended warranties (also known as vehicle service contracts) on new-truck purchases? Sometimes yes; sometimes no. The answer is not the same for every fleet or even every vehicle in a specific fleet. To determine when extended warranties make sense for you, consider the following seven questions.
1. Do you plan to keep the vehicle beyond the initial factory warranty?
How many miles per year do you plan to run this vehicle? How long will you keep it? If the miles and timeframe you intend for the vehicle fit within the parameters of the original warranty, an extended warranty is unnecessary. However, if you expect the miles and term to exceed the original warranty, determine by how much. This will help assess the risk and potential cost of a catastrophic repair occurring during the post-warranty period, as you determine whether extended warranty coverage would be worth the investment.
2. How will the vehicle be used?
Three main factors impact component life.
- Duty cycle. Will the vehicle be driven in stop-and-go traffic or primarily over-the-road?
- Terrain. Will the vehicle be operated on hilly or flat terrain?
- Climate. Will the truck run in extreme cold or heat weather conditions?
Based on these three factors, analyze the lifecycle and maintenance data for the vehicle and the components you're looking to cover.
"It's critically important to gather this data when evaluating whether or not you should purchase an extended warranty," advises Rob Kooken, regional fleet services manager with PHH Arval, a provider of outsourced commercial fleet management services in the United States and Canada. "Get this data from your own maintenance records or ask your fleet management company for relevant bench-marking data."
This information will help determine the likelihood of necessary repair within the extended warranty period and whether the estimated repair costs would be worth the up-front investment.
3. What, exactly, is the coverage?
Look at miles, term (time period), and components covered. Is only the driveline covered? What about electronic components? What about A/C? Are these items covered? Identify the coverage to accurately estimate the warranty's cost/benefit.
Even when considering a simple powertrain warranty, clarify exact details of items covered so there are no unpleasant surprises down the road.
As an example, here's the breakdown of the specific components Isuzu covers with its powertrain extended warranty on the NPR cab-over chassis:
- Engine coverage: cylinder block, head, all internal parts, flywheel, and intake manifold.
- Transmission coverage: transmission case and all internal parts.
- Drive axle coverage: differential, axle shafts, seals, and bearings.
Notice also what this warranty does not cover. If the A/C compressor malfunctions or electronic window regulators fail, you'll expect to pay the full amount of the repair or purchase a plan that includes coverage for those components.
As with original factory warranties, extended warranties are designed to cover manufacturer defects only. "Wear-and-tear" items, such as brake pads and rotors, brake shoes and drums, and manual clutches, are usually not covered.
Some extended warranties may also include:
- Roadside assistance. Provides a 24-hour toll-free number to call when the vehicle breaks down or in case of an emergency, rapid response services, including towing, battery assistance, flat-tire assistance, emergency lock-out, or fuel delivery.
- Rental car benefit. Amount reimbursed for actual expenses incurred for rental car while vehicle is repaired.
- Transferability. If the vehicle is sold before the coverage has expired, is the plan transferable to the new owner? If so, what are the stipulations?
Decide whether these additional services add enough value to your fleet operations to justify the additional cost.
4. What is the deductible?
The out-of-pocket expense at the time of repair, deductibles range from $0 to $100 to $500 and more, depending on the plan. The higher the deductible, the lower the up-front warranty cost and vice versa.
A key question to consider is: Will multiple deductibles be charged when more than one repair is required in a single visit? If so, beware. Accruing deductibles on a single visit could negate any cost benefit of an extended warranty.
5. Which is better: OEM or third-party extended warranty?
"Normally, the OEM warranties are much easier to deal with because you're usually getting new factory parts. Sometimes a third party may take the option to cover a rebuilt part, instead of a new part," says Kooken.
If you choose a third-party warranty, find out what parts are used for repairs. Are you comfortable with aftermarket or rebuilt parts being used by the third party? Will parts used in the repair be backed by warranty?
With most OEM warranties, the dealer charges only the deductible and bills the manufacturer for the balance. Some third-party warranties also operate this way; others, however, require the full amount billed up-front and reimbursed when the claim is approved by the company. Whether an OEM or third party is selected, be aware of the claims process up-front so no unexpected surprises requiring out-of-pocket expenses occur, which often take at least several weeks or even months to get reimbursed.
A potential downside to an OEM extended warranty is the inconvenience when not using the dealer for non-warranty maintenance and repairs, cautions Ken Costello, assistant manager, truck and equipment maintenance, with Automotive Resources International (ARI), a global provider of fleet leasing and management.
"There may be an additional cost of using a dealer that charges a higher labor rate for brakes and oil changes than perhaps an independent or national account provider, such as Firestone or Goodyear. You may pay more for some services trying to make sure you take full advantage of the warranty," says Costello.
Other factors that impact the value of an OEM warranty:
- Location to nearest dealer. A vehicle that must be driven 25 miles or more to the nearest dealer for warranty work could detract from the value of warranty because of the additional time the truck is taken out of service for repair. This downtime leads to lost revenue, critically important when evaluating all costs involved with the warranty.
- Dealer workload. What options are available if the authorized dealer is so busy, it will take another week before your truck can be serviced? What provisions in the warranty help with this situation? Will it be possible to use an independent shop to perform a covered repair, if the shop gets prior approval from the OEM?
An implied advantage to an OEM warranty is the manufacturer, not a fly-by-night company, backs the warranty. With third-party warranties, the risk of the provider going out of business is much higher.
"When you go outside the manufacturer to third-party warranty providers, you need to make sure it is a reputable company, where you're confident that when it comes to file a claim, you're going to be reimbursed," says Kooken.
To determine whether the company is reputable, Kooken recommends asking the plan provider for references.
"Ask what clients they've used. How has their claim experience been?" he advises.
6. What is the cancellation policy?
A warranty should be cancellable with a refund issued for the pro-rated unused portion of the policy. This is important if the vehicle should be sold before the warranty expires or if the truck is deemed a total loss in an accident. Will a pro-rated refund be available, no questions asked, if you choose to cancel the warranty? Find this out up-front.
7. How many vehicles are covered with an extended warranty?
Costello says the tipping point on whether an extended warranty is worth the cost is based on the fleet size. If covering 100 or more trucks, factor into the decision the total cost of all warranties combined and whether projected repairs would exceed the fleet-wide warranty.
"The larger number of vehicles involved, the more it's going to pay for the fleet to bankroll the risk [of repairs] themselves, instead of purchasing extended warranty coverage," advises Costello.
The Bottom Line
When determining whether an extended warranty is right for your fleet, there's no one-size-fits-all answer. Use these seven questions as a guide through the process to decide what best fits your fleet operation.