Whether you’re driving an old beater or a brand new vehicle, you’ll want to protect against unforeseen damages — either with your car insurance policy or your car warranty. But do you need both?
The answer to that question may depend on your individual situation. In order to make that decision, you'll need to know the difference between a car warranty and a car insurance policy. Understanding the pros and cons of both will allow you to make an informed choice that will benefit you and your wallet.
What is car insurance?
Auto insurance is a contract between you and an insurance company, in which you pay a pre-set amount of money each month in exchange for coverage in the event of a collision or incident. Car insurance may also cover costs during the transition period between totaling a car and purchasing a new vehicle.
Car insurance is not optional. To legally drive a car in the U.S — in any state aside from New Hampshire — you must carry an active auto insurance policy. A lapse in car insurance coverage may end up raising your insurance rates or resulting in a ticket.
Car insurance coverage options
While state-minimum auto insurance is legally required in order to register a vehicle, you can choose to add or subtract coverage options. Most states require a minimum of liability coverage. Other options to consider include:
While those listed above are the standard coverage options, you can also request additional coverage options. If you’re struggling to understand the difference between car insurance and car warranty, you might have confused car warranties with mechanical breakdown insurance.
Mechanical Breakdown Insurance (MBI)
MBI is very similar to a car warranty. It protects your car in the event it sustains damage outside of an accident. It can be purchased as an additional endorsement, instead of through the car dealer (as you would with a car warranty).
What is a car warranty?
While car insurance protects a vehicle after an accident, a car warranty covers repair costs. Also known as a manufacturer’s warranty, car warranties are primarily used as buffers against sudden, dramatic financial loss due to a car defect. If your car is a clunker, consider purchasing a car warranty. Car warranties cannot be used to cover parts that break due to “wear-and-tear," including windshield wipers, tires, and brake pads.
Car warranties come in a variety of packages: powertrain, inclusionary, and exclusionary.
- A powertrain warranty is the least comprehensive, covering only the bare necessities — like the engine.
- An inclusionary warranty is more comprehensive, covering a specific list of components.
- An exclusionary warranty acts as a safety net, as the highest level of coverage aside from a manufacturer's warranty.
What is a vehicle service contract?
A vehicle service contract functions similarly to MBI or a car warranty, but a vehicle service contract (VSC) is brokered by a third party. You can purchase a new one at any time. Often confused with an extended warranty, a vehicle service contract can provide coverage after you purchase a used vehicle, or when the warranty on your current car expires. If you purchase a vehicle service contract, you are not working with the insurance company or the manufacturer, and your contract will not be governed by as many regulations.
Car warranty basics
A car warranty can be confusing. Let's examine some of the more complicated points.
Certified pre-owned vehicle vs. used vehicle
There is a difference between a certified pre-owned vehicle (CPO) and a car that has had a previous owner prior to your purchasing it. A CPO has been officially approved by its manufacturer to be in good, drivable condition. If the car you’re looking at is a CPO, most manufacturers will offer an extended warranty.
Extended warranties kick in after the first warranty has expired, covering the CPO for another 60,000 miles — or three years from your purchase. With a non-CPO vehicle, your options are a bit different, but you can still be covered. An aftermarket warranty is essentially an extended warranty for non-CPO vehicles.
With a CPO, all or part of a car warrant will be transferred to you when you purchase it. Purchasing a non-CPO car can be risky: if the vehicle breaks down, you could be left without protection and facing a steep maintenance bill.
What voids a car warranty?
There is a difference between a voided policy and what the policy simply won’t cover. Most warranties are fairly flexible. The only thing that will immediately void a policy is if your car is given a salvage title and declared a total loss. In other cases, there may be more wiggle room.
A modification to the vehicle generally won’t void your warranty, and you can still use aftermarket replacement parts for repairs. However, the warranty won’t cover an aftermarket part after it breaks, so be sure to avoid using unproven components.
Warranties also do not cover components broken during a race or competition — including off-roading — of any kind. Furthermore, warranties won’t cover parts that are broken due to neglect or misuse.
Other car warranty options
If a car warranty isn’t your cup of tea, alternatives exist.
- Roadside assistance: covers towing costs and tire changing if the car breaks down during travel
- Rust or corrosion warranty: covers rust in sheet metal parts of the car
- Federal emissions warranty: covers repairs needed to correct defects in parts that would prevent the car from meeting Environmental Protection Agency standards
Do you need car insurance and a car warranty?
While car insurance is non-negotiable, you do have an option of whether or not to purchase a car warranty.
Let’s review the benefits and drawbacks of car warranties:
Car warranty pros
- Peace of mind. As with a home warranty, the main benefit is simply not having to worry about unexpected costs.
- Customization. You can choose from different coverage levels or negotiate with car warranty companies for a deal that works best for you.
Car warranty cons
- They don’t cover everything. Like home warranties, most car warranties have limitations on the types of repairs — or amount of repairs — they’ll cover.
- It's usually a better deal for the warranty company than you. Consumer Reports found most people spend more than they save on car warranties.
Are car warranties worth it?
If you’re really looking for the best deal, remember you don’t need to buy a car warranty from the dealership. Remember: a car warranty is not required — if you can't afford it, ensure you stay current on your auto maintenance and repairs to avoid breakdowns.
Many cars come with factory warranties covering the same things as an extended car warranty. Most factory warranties last three years. If you want to extend this coverage after three years, consider a car warranty.