Should You Get An Extended Warranty For A Car?

When buying a new or used car it is common to consider purchasing an extended warranty that kicks in after the original new-car warranty expires. A warranty may overcome fears of big repair bills down the road given the technology in today’s vehicles. Compared to our parents’ generation, without advanced training and equipment, repairing or even diagnosing problems in cars today is beyond the capability of almost anybody. All major vehicle systems - engine, transmission, handling, braking, driver information and entertainment – are built from cutting-edge materials and aided or controlled by innovative technologies. If there are problems, they can be costly. Hence, the popularity of extended warranties.

Information on whether to buy an extended warranty for a car

Is An Extended Car Warranty Worth the Money?

While cars are more complex today, the flip side is that they are more reliable. So, is an extended warranty worth the money? A recent Consumer Reports survey found that 55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the life of the policy. Less than 30 percent of all respondents who purchased an extended warranty said they would definitely do so again. Consumers should also know that, according to a Forbes Magazine analysis of the six publicly traded new car dealer groups in the U.S., extended warranties, and auto financial services in general, are the most profitable business line for car dealers, after service and parts.

Consumers should first be aware that an extended warranty is simply an insurance product. In exchange for an up-front fee, i.e., a premium, the policy is designed to reimburse the holder for most major repair costs for a fixed period of time, after a deductible per occurrence, e.g., $200. The insurance company’s pricing model will set the premium assuming a worst case scenario, such as: (i) you will keep the car for the entire time the warranty is in effect, (ii) you will drive more miles than average, and, (iii) you will not take good care of the car. Thus, responsible warranty buyers pay for the sins of others, like any insurance product.

We are skeptical that an extended warranty on a new vehicle is sensible. Comprehensive, long-term warranties are a common feature of new cars and are a way for car companies to differentiate their offerings. Also, manufacturers have built-in considerably more reliability in new vehicles today. For example, with the use of advanced materials, engine wear is a fraction of what is was just 15 years ago.

Extended Warranties For Used Cars

Should you consider an extended warranty when buying a used car?

A used car extended warranty may be worth considering, but again, for $2,500 or $5,000 or even more, given the better reliability of cars today, we are skeptical. It is important to consider how long you are really likely to own that used car before you buy insurance that you may not even use. Also, the additional cost for a certified used car with an extended factory warranty may be more cost effective than an un-certified used car plus extended warranty.

Also, the price of a used car extended warranty is highly dependent upon the number of miles the car has already been driven, the age and reliability of the vehicle, and the term of the warranty contract. Recently, I priced an extended warranty on a four-year-old SUV with just 17,000 miles. The extended warranty was quoted at about $2,000, but if the truck had over 20,000 miles - a higher mileage band - the price for the warranty would have been significantly higher. Thus, for the same year and model, the price for an extended warranty can vary by a lot. For several reasons, including extended warranty cost, it may be worthwhile paying a little more for a low-mileage than a high mileage used car.

If you think you may want an extended warranty, for example, because your target used car’s warranty will soon expire, by all means do not wait until after the rest of the deal is negotiated to bring up the warranty. Make a very aggressive all-in bid for your vehicle of choice after careful research and include all the aspects of the deal: the price of the target vehicle, trade-in value of your car, finance rate and terms, taxes and fees, and the extended warranty. In a “divide and conquer” strategy, sellers separate the elements of a purchase decision and delay as afterthought add-ons such as warranty as a way to maximize profitability.

Finally, if you feel compelled to buy an extended warranty, it may be worth a bit of reflection over whether you are buying the right car. If you think you need the warranty to overcome the fear of huge repair bills down the road, maybe you’re simply not buying the right car.

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