4 Key Questions Retirees Should Consider Before Buying an Extended Car Warranty

If you're considering an extended car warranty, it pays to slow down first. Before agreeing to this kind of contract, do your research carefully.

Skipping the right questions could lead you to spend too much or buy coverage you don't really need. According to Kelley Blue Book, extended car warranties can range from a few hundred dollars to several thousand dollars a year.

For some vehicles, such as certain luxury models and sports cars, the coverage may be worthwhile. For many standard cars, though, paying for repairs yourself may end up being the less expensive choice.

Not knowing the details can also make you an easier target for scams.

Auto warranty scams are widespread, according to the Federal Communications Commission. They often begin with an automated or prerecorded call that asks for personal information. The pitch can seem convincing because the caller may already know details about your car and warranty, making it appear legitimate.

MoneyLion spoke with Ray Shefska, co-founder of CarEdge, to learn which questions buyers should ask before purchasing an extended car warranty. Here are the main things to know before deciding on coverage.

1. Who underwrites the policy?

"All vehicle service contracts are a form of insurance, so the viability of the underwriter of the policy is vital to the effectiveness of the plan," he said. "If the underwriter lacks sufficient cash reserves and faces numerous expensive claims, they may be unable to pay those claims or worse, declare bankruptcy rendering all outstanding contracts worthless, such as U.S. Fidelis did in 2010."

2. Is the contract exclusionary or inclusionary?

Exclusionary contracts tend to offer broader protection because they spell out the repairs that are not covered, he said. Inclusionary policies are narrower, since they only list the items that are covered.

Because they cover fewer repairs, inclusionary contracts usually cost less, he said.

3. Where can repairs be performed on my vehicle?

Will you pay upfront and wait for reimbursement, or will the warranty provider pay the repair shop directly?

A strong extended warranty should let you visit any licensed repair facility or ASE-certified mechanic, and the company should pay the shop directly once the work is finished, he said.

Lower-quality warranties may limit repairs to preferred shops and often require you to pay first and wait for repayment.

4. What deductible will I have to pay?

"Typical deductible ranges are $0, $50, $100, $250, $500 or $1,000," he said. "Similar to your auto insurance, the higher your deductible the lower your premium."

Before you sign a vehicle service contract, make sure the deductible is one you can comfortably afford, he said.