Does an extended warranty pay for itself?

More than a few Aussies are concerned about what the future holds for job security and disposable income.

That uncertainty is evident in sales of new cars, hinting at an economy that's been roughed up by tight lending criteria and the prospect of a second wave of coronavirus infection.

But there is an upside. You can do a great deal on a new car in the current climate, but if you're in doubt about job security, buying a used car now is the safer option. Leave the new-car purchase for further down the track when the economy is on the mend.

Is your current car still running like a clock? Is it still safe, comfortable and affordable to own? Why not stick with it and arrange an extended warranty to cover any expenses outside the scope of regular servicing?

A small outlay for an extended warranty is a much better option for some buyers than saving the thousands extra to trade up to a vehicle that's new, a vehicle that will lose value in depreciation within a few years of ownership.

Buyers often get in over their heads with finances for a car they don't really need – which can include recent-model cars as well as new models. An extended warranty eliminates substantial costs to repair an unexpected fault.

No one knows a second-hand car like the present owner. If the car has been maintained carefully, is in good condition and has provided dependable service over a few years it makes perfect sense to keep it and insure against a mechanical failure for the low cost of an extended warranty.

Many buyers appear to be already thinking this way, holding off the purchase of a car fresh from the factory until the economic portents cease to look as ominous.

Business and consumer sentiment are already showing signs of improvement. In the meantime, buyers can use the money they would spend on the purchase of a new vehicle more productively – by paying more off the mortgage for example.

An extended warranty may also be an option for consumers who don't currently own a vehicle. Younger drivers are frequently keen to buy new, but purchasing a used vehicle instead – up to 10 years old – means lower depreciation over the term of ownership. Once again, an extended warranty is key to making that choice work – neutralising exorbitant costs for repairs.

And for those who own a car already, but have fallen out of love with it, set your sights lower and purchase a used car that's just a few years old. It will feel 'new' after trading in the current car.

There are many good reasons to buy a used car or stay with your current vehicle. It is an affordable way to go and the buyer will save thousands over a few years, after accounting for the interest and principal on a car loan, the depreciation and on-road costs.

But owners are well advised to arrange an extended warranty for the car. Otherwise, all that money saved could go up in smoke, fixing mechanical problems that do crop up from time to time.

As a final word, any common component failures should be rectified by the importer and its dealer network at no charge to the owner of the vehicle, according to the Australian Competition and Consumer Commission. That would hold true even beyond the expiration of the standard factory warranty.

The ACCC is the watchdog that enforces compliance with Australian Consumer Law (ACL), which stipulates that the 'rejection period' for a claim from a consumer may exceed the duration of the factory warranty.

In other words, if a dud fuel injector from the factory results in a burnt-out valve three days after the end of the factory warranty – and provided there's no reason for the manufacturer to suspect your vehicle has been subjected to abnormal use (abuse) – the cost of repair is to be born by the importer. That's what ACL tells us, but the rejection period hasn't been tested in courts of law. So if the valve is destroyed two years after the expiration of the warranty period, ACL may not provide the protection the vehicle owner requires.

At that point, the owner's only option – in the face of the importer and its dealer rejecting the claim – is to take them to court. Dragging a car company or a dealer through a civil and administrative appeals tribunal over a period of months, costing the owner a legal adviser to assist with the claim – only to have the claim rejected by the tribunal anyway – is when an extended warranty really pays for itself. And you’ll have your car back on the road much earlier.