Buying an extended warranty

All new cars come with original warranty provided by a car manufacturer. This original warranty covers most of the vehicle components for a certain period - most commonly, three years or 36,000 miles. After the original warranty expires, you will have to pay for all repairs out of your pocket. This is when an extended warranty may be helpful. An extended warranty is basically a service contract between the car owner and the warranty company. According to this contract, the warranty company will pay for the repairs covered by the contract for a specific period of time. It's something like health insurance for your car. With an extended warranty you are protecting yourself from unexpected repair costs.
For instance, you bought a used car that is out of original warranty and the transmission fails. If you don't have an extended warranty you will have to pay out of from your pocket, transmission repair may cost you more than a couple thousand dollars. If you have a good extended warranty, it would cover most of the repair costs - in some cases you would only have to pay a diagnostic fee, or a deductible, depending on the type of warranty you have.
However, not all cars are qualified for an extended warranty and not everything is covered. Items like belts, brakes, tires and other wearable parts are usually not covered. Also, you still have to maintain your car properly and keep all the receipts.