There really was a good reason why our parents enforced those study habits when we were young.

“Doing your homework” can pay off in making adult decisions, such as when purchasing a vehicle and choosing an extended warranty.

There are two main types of extended warranties: those backed by the car’s manufacturer and those offered by independent companies, known as aftermarket warranties. An extended service contract backed by an auto manufacturer typically costs more and mostly covers new vehicles. Typically, they are the easiest to deal with from the repair facility side. With these plans you never have to pay up front on a covered repair, except for your deductible. Repairs are almost instantly approved, except in very rare instances where an inspection is required, and the whole process is basically seamless. What this means to you is a lower financial burden and faster approvals, not to mention quicker repairs. They encompass a wide range of repairs and services that can be done at any authorized dealership nationwide and tend to be approved without a problem.

The aftermarket auto warranty is a warranty contract issued and honored by a service dealer other than the manufacturer’s authorized dealers. Aftermarket warranties from an independent company are usually not as expensive as a manufacturer’s warranty and can be purchased for both new and used cars. This type of warranty can be purchased through the original dealer or from the insurance company. In both cases, there are important factors to consider. The option of buying the warranty from the dealer is considered a better one because in this case it becomes easy to renew or sustain the contract in the future. However, a major drawback is that the warranty bought from the dealer usually tends to be more expensive. It may also cover less versus the warranty bought from the insurance company. Another risk with purchasing an aftermarket auto warranty is the financial stability of the company that you are purchasing the warranty from, so be sure your research is very thorough before investing.

Generally, aftermarket warranties are only honored by the issuing service provider. This means your vehicle must be taken to the same place for servicing or repairs as where you bought the warranty.

Prices vary on aftermarket warranties as well. A good source for an aftermarket warranty is your local credit union. With this type of warranty, you may have to pay for repairs upfront and wait to be reimbursed by the company, which may take weeks. Be sure to ask about the reimbursement process before signing on.

Some other points to consider: Remember your choice of vehicle affects the cost of the warranty. Warranties for well-built vehicles with good repair histories will cost less. Also keep in mind the higher the mileage on your car, the tougher it will be to find a good extended service contract. Most extended warranties end when the odometer on a car reaches 100,000 miles. Some extended service contracts require used car owners to wait 30 days or 1,000 miles before filing repair claims. Many extended warranty contracts cancel—meaning you lose the money you invested—once you sell the car. Other contracts may be transferred for a fee.

The bottom line: Shop around and proceed with caution. Extended warranties are colossal moneymakers for auto dealers and anyone who sells them. Three different dealers could present you with three very different sets of numbers for a similar contract. Regardless of where you shop, do business with a large, reputable company you know and trust. Read the contract carefully and understand what is covered and what is not covered. Pay particular attention to the “exclusions” list—parts that aren’t covered by the warranty. And above all, be skeptical of what the salesman tells you.

SOURCE: Bankrate.com