by Daniel Mendoza-Jones
Some of the greatest worries for car buyers are the reliability of their new purchase, how much the car will cost to repair if there is a problem, and whether the manufacturer or seller will provide assistance if things don’t work as they should. Most people are aware that their new or dealer-sold used car comes with a warranty, but they don’t necessarily understand exactly what those warranties offer. Some people also buy an extended car warranty at the time of purchase to try to achieve greater peace of mind. In this article, we look at the warranties that come with new and dealer-sold used cars. We then consider the details of those extended car warranty products, so you can make the best decision about whether they suit your needs.
New and dealer-sold used car warranties
A warranty given by a car manufacturer or dealer is a guarantee that the manufacturer or dealer will fix problems that arise during the warranty period. Exactly which problems will and will not be fixed are explained in the warranty terms, which your car dealer should take the time to explain. There are usually exclusions and special conditions, so if you don’t feel that you understand all the warranty details, ask the seller more questions. After all, warranties are designed to protect and give you some comfort about the purchase.
There are two main types of new car warranty that you should understand.
1. New car statutory warranties usually provide cover for one year or 20,000km, whichever occurs first.
2. New car manufacturer’s warranties usually give you cover beyond the statutory warranty period. These warranty periods are usually ‘two years or 40,000km,’ or ‘three years or 60,000km.’ New car warranties usually cover the car and any accessories that are fitted to the car at the time of purchase.
If you are buying a used car from a dealer, you should receive a used car statutory warranty, which provides cover if the car has less than 160,000km on the odometer, is under 10 years old and does not exceed the luxury car tax threshold. This kind of warranty offers you less protection than a new car warranty. It is usually valid for three months or 5,000km from date of sale. The warranty usually covers car issues relating to safety, reliability and roadworthiness.
One thing to keep in mind when selecting the brand of your new or dealer-sold used car is how easy you think it will be to hold the car manufacturer to its promise. For example, we have heard from some owners of European cars bought in Australia that they have had warranty claim difficulties. This has usually been the case because local car owners are required to deal with the European car company’s local agent, whose main focus is on selling cars and not necessarily providing after-sale service. You should consider first speaking to other people who have bought new cars, especially from smaller foreign manufacturers, to learn about their experiences.
As part of the sale negotiation, car dealers often promote the need for the customer to purchase an extended warranty, which is designed to give the buyer cover beyond the original warranty period. Even though these extended warranties are promoted by car dealers, they are usually insurance policies issued by an insurance company. So, if you need to make a claim, you’ll be dealing with the insurance company, not the car dealer or manufacturer. It’s common for a car dealer to offer an extended warranty at an apparently discounted rate in order to add perceived value to your purchase.
Just like any other type of insurance, there are some good extended warranty products and there are others which are highly restrictive and do not represent good value. It’s very important to understand the details of the extended warranty and calculate whether it’s worth the additional cost. In doing so, you’ll see that extended warranties are usually much more restrictive than other statutory and manufacturers’ new car warranties. Typical extended warranty exclusions include wear and tear, car modifications, damage or defect caused by misuse of the vehicle and other parts or systems specifically described (such as manual transmission clutches and door lock actuators).
The Office of Fair Trading in NSW has pointed out some common extended warranty conditions and requirements:
- A regular service during the whole warranty period at a specified place (such as at the dealer from which you bought the car) at your own cost, for example, every 5,000km/6 months or 10,000km/12 months depending on the distance the vehicle has travelled;
- An excess payment up to $500 per claim depending on the part that fails;
- A service coupon which must be stamped and posted within 7 days; and
- A maximum payout limit (which may not cover the necessary repairs and you may need to pay the gap yourself).
Some people also agree to buy an extended warranty because they think it will help them on-sell the car during the extended warranty period. For example, if the extended warranty period is five years, and you think you might only want the car for three years, you might be able to market the car has having two years remaining on its extended warranty. This can be possible, but you must first check whether the extended warranty can be ‘assigned’ to another person, and if so, under what conditions. If you’re not sure, ask the dealer before agreeing to the purchase.
You should also keep in mind that many car dealers are strongly encouraged to sell you an extended warranty product. This is often because there are commercial arrangements between the dealer and the insurance company, the details of which are not usually made clear to purchasers. For example, car dealers can often earn lucrative commissions (the part of the fee that goes to the dealer to reward him or her for selling you the product) on the sale of extended warranties, in addition to other less obvious rewards such as volume bonuses which reward the dealer for selling a certain number of extended warranties each month or year. So, you should be sceptical if a car dealer tells you that the extended warranty is being provided to you ‘for free’ or ‘at a loss,’ because it’s likely that the dealer will be financially rewarded by the insurance company in other ways.
If you’d like to know more about car warranties, or check whether there are special things to keep in mind in your state, visit the website of your state’s fair trading office in your state: