If you are planning to keep your vehicle beyond the standard warranty period, or you’re buying a used car, we recommend that you consider an extended warranty because the average transmission replacement costs about $2,500, engines cost in the neighborhood of $4,000, and in-vehicle electronics can cost a small fortune to replace. Repairs of this nature can destroy most people’s budgets and cause immediate financial hardship. By contrast, an extended warranty is usually about $1,000.

Extended warranties have evolved in recent years. Back in the early 1990s, extended vehicle warranties were either offered by the carmaker or by obscure little companies selling consumers a bill of goods. Having been a service manager, I can tell you horror stories of dealing with these huckster extended warranty companies that denied every claim that came into their ‘call centers’ (sometimes nothing more than a one-room shack in the middle of nowhere).

Today, reputable companies like AIG, Allstate, and NAPA have thrown their hats into the extended vehicle warranty ring, adding credibility to the industry and offering genuine coverage to motorists. The caveat here is to research the company before buying. Ask questions such as:

To whom you can pose these queries? The service department manager or writer at your favorite repair facility can answer your questions. These people deal with extended warranty companies all the time and know which are reputable and which is not.

If you decide that an extended warranty is right for you, make sure you know what’s covered and what’s not, as well as what your responsibilities are to the agreement. Some companies require the use of a particular chemical during scheduled maintenance. For example, the Wynns product warranty brochure says to make sure that you use its additive chemicals in covered components as prescribed by the company, carefully following the recommended time and mileage intervals. If you don’t follow these prescribed procedures, any warranty claim made to Wynns is sure to be denied.

Some companies offer tiered coverage depending on vehicle mileage, year, service description (how it’s used), and the condition of the vehicle at the time of contract purchase. Most extended warranty companies require that you have an in-depth inspection of the vehicle performed by a company-approved inspection station before they will provide coverage. This is perfectly understandable when you consider pre-existing conditions like engine or transmission wear and damage.

Other companies offer plans with no deductibles or tiered deductibles. The method of payment of claims varies. Some plans allow for immediate payment to the service provider via the use of a company credit card. These are the best, because the service provider gets paid immediately and therefore is more willing to deal with the extended warranty company. Others plans require that you first pay the bill, and then they will reimburse you later after you send supporting documentation for the claim into their fulfillment department.

The bottom line? Learn as much as you can about the company you’re dealing with – before purchasing an extended warranty. And don’t forget to read the fine print.