If you’ve bought a new or used car from a dealership, you’ve probably experienced this. After spending an hour or four haggling over the price of the car and whether they will include floor mats and pin-striping, you, your salesperson, and the sales manager finally come to a deal. Next, they hustle you into a little office where a person known as the finance and insurance manager tries to sell you even more stuff, one of which is an extended car warranty.
In a previous post, I wrote about how extended warranties are a huge business in the United States and why these extended warranties are not worth the money. Of the $40 billion spent on extended service contracts in 2016, 42.5% or $17 billion alone was spent on vehicle warranties.
This brings up the question in every car buyer’s mind when they are in the finance manager’s office. Is buying an extended car warranty a good idea? Should you buy an extended warranty for a used car? For the vast majority of car shoppers, an extended vehicle warranty is not worth the money. You are better off putting that money into an emergency fund for future car repairs as they come up or towards your next car purchase.
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Why Do People Buy An Extended Car Warranty
For many people, their car is the second-largest purchase they will make in their lives besides their home. As cars get packed with more and more technology, from blindspot monitors to self-driving aids and transmissions with as many as 10 gears, the cars become more costly to purchase and also to repair when something goes wrong. The cost to repair a transmission can range from $1,800 to $3,400. When more than half of Americans have less than $1,000 saved, expensive car repairs can be a major financial setback.
Extended car warranties can give a peace of mind for people purchasing a new car. An aftermarket warranty can protect against unexpected repair costs after the manufacturer warranty expires for new cars. It can provide free roadside assistance, towing, and a rental car when your car breaks down. You can buy the warranty to protect your used car when you don’t know how well the previous owner treated or maintained it.
People like having a warranty so in the event something does happen, they can take the car back to the dealer and the repairs can be done with minimal money out of their pocket instead of getting a big bill for thousands of dollars.
Why An Extended Car Warranty Is A Poor Financial Decision
Dealerships are in business to make money. They will not be selling you a warranty if they aren’t getting anything from the sale. Here is why an additional warranty doesn’t make sense:
Car Reliability
A long-term study on the value of extended warranties by Consumer Reports found that 55% of car owners who purchased a warranty did not use it for repairs during the policy’s life.
Cars, in general, are more reliable these days. It is not uncommon for most cars to get over 100,000 miles with minimal problems.
Existing Warranties
All new cars come with a manufacturer’s warranty that will cover the cost of repairs for any problems that come up in the first few years of their life. Most basic warranties are for 36 months and 36,000 miles. Many luxury cars in recent years have increased their factory bumper-to-bumper warranties to 48 months and 50,000 miles.
These basic factory warranties cover everything that may go wrong except “wear items” such as tires, brake pads, windshield wipers, or light bulbs.
People usually splurge for an extended warranty because they are worried about the major components of a car needing pricey repairs. If you are worried about your engine, transmission, axles, or driveshaft going bad, besides the factory warranty most manufacturers include a separate powertrain warranty that covers those components for 60 months and 60,000 miles.
Repair Costs Are Less Than Expected
Consumer Reports’ survey found that among people who did use their extended warranty policy, their median savings on repairs was $837. This included cars from all brands, both non-luxury and luxury. Meanwhile, the median price paid for extended coverage was $1,200. This is a difference of $363 that a warranty buyer won’t get back.
Another thing that reduces the amount of savings when using a warranty is the deductible for the policy. Deductibles can range from zero to as much as $250. Depending on the warranty company, these could be charged per repair or per service visit. By charging a deductible, they lower the number of people filing claims for every minor problem.
Pre-Existing Conditions
Don’t buy a used car and expect it to be covered under the extended warranty if it needs repairs for a pre-existing problem. Depending on the policy, if you have a claim in the first 30 or 90 days, the warranty company will either not cover it or send an inspector to the shop to see if the damage occurred recently or over time.
Routine Maintenance Costs Not Included
Don’t buy extended warranties expecting everything to be covered. Almost all extended warranty policies exclude preventive and routine maintenance costs because they only cover mechanical repairs.
Routine maintenance is the normal service to keep your car operating properly and prevent issues that could lead to future costly repairs. Failure to keep up with your car’s scheduled maintenance could void your warranty.
If you want to keep your car maintenance costs down, you would want to skip the luxury-branded cars. A family member who owns a Lexus sedan is charged $60 for a synthetic oil change at the dealer. A similar oil change for a Toyota is half that.
Waiting For Reimbursements
Some auto warranty companies pay the claims directly to the repair shop. Others will make customers pay for the repairs themselves and wait for reimbursements. If the company you pick is the latter, you will still need an emergency fund or credit card to cover the repairs while you wait for the check from the warranty company.
Vehicle Warranties: From Bad To Worse
Besides spending thousands of dollars on a warranty that over half the people don’t even use, many people roll the cost of the extended warranty into the financing.
Experian found that the average auto loan rate was 5.96% for new cars and 9.57% on used cars in 2019. The average auto loan term is now nearly 69 months for new and 65 months for used.
Adding the warranty into the financing makes it a lot more expensive once the interest is calculated. A $2,000 extended auto warranty would now cost $2,367 for new cars and $2,570 for used cars.
What To Do Instead of Buying The Warranty
Allocate Money For Repairs
Take the money you would have spent on an extended warranty and put it into a separate account, preferably a high-yield savings account. This is commonly called an emergency fund. Now you will have money available in case something does happen and your car needs repairs.
Perform Maintenance on Schedule
All owners’ manuals have a schedule with the recommended services and their intervals. Cars are like your body. You need to maintain them to get a long life out of them and avoid expensive future problems.
Change the fluids on time. That is probably the cheapest thing you can do. This includes the oil, coolant, transmission, brake fluid, and differential or transfer case fluids. Don’t skip the major service intervals. Something as simple as a timing belt breaking could result in catastrophic engine damage.
When To Consider An Extended Warranty
After reading about how extended warranties are generally a bad idea, there are a few exceptions where one might actually make sense. This is when you are buying a car that is statistically less reliable than average and also expensive to repair.
Cars that may fall in this category are Mercedes-Benz, BMW, Chrysler, Dodge, Maserati, Land Rover, Bentley, Audi, or Aston Martin.
Consumer Reports asked car owners how satisfied they were with their extended warranties and the most satisfied were the owners of the less reliable brands, with 71% of BMW owners saying they had used their warranty coverage, followed by 65% of Chrysler owners, 63% of Dodge, and 60% of Mercedes-Benz.
Winning the least reliable car lottery and having an extended warranty to save you from the repair costs isn’t a prize. Remember, the warranties are essentially an insurance policy. The companies that offer the warranties are there to make money. It shouldn’t come as a surprise that that extended warranties for BMWs and Mercedes are among the most expensive due to their repair costs and frequency.
Not only do you pay more for cars such as a Mercedes and BMW when you buy it, but you are also paying more for the warranty, and then you end up with a car that is less reliable. Rather than driving and enjoying your car, it’s stuck at the mechanic.
Next time you are driving around, take a look at the brands and models of the older cars still on the road. There is a reason why you don’t see many older model BMWs or Mercedes but plenty of Hondas and Toyotas.
Check the reliability ratings from Consumer Reports, CarComplaints, or J.D Power before walking to the dealer lot if you are looking to save money in the long run.
Still Want The Warranty? What You Should Do
Negotiate
If you decide you still want to buy an aftermarket vehicle service contract, at least be smart about it. Don’t immediately take the first offer from the finance manager. Dealerships will mark up the price of the warranty as much as 200%. That means just like the car sales process, you can negotiate down on the price of the warranty.
You wouldn’t go in and pay MSRP on the price of the car if you are looking for the best deal. You shouldn’t do it for the car service contract either.
Got buyer’s remorse after buying the extended warranty at full price? Not a problem if you act fast. You can usually cancel the warranty within the first 30 days or 1,000 miles and get a full refund.
Consider A CPO
A CPO, or certified pre-owned vehicle means that the car has gone through a pre-sale inspection process at the dealer, often involving more than a hundred different items. This gives used car buyers peace of mind that there are no unexpected problems before the purchase.
The other benefit of a CPO vehicle is it can include an extended warranty, roadside assistance, free towing, and a loaner car while your vehicle is in the shop. GM, for example, gives certified used vehicles a 12 month, 12,000-mile bumper-to-bumper warranty and boosts the powertrain limited warranty to 6 years or 100,000 miles.
Check The Reputation Of The Warranty Company
Read the reviews of the company selling the policy. You want to avoid scammers who take your money and won’t pay out when it comes time to use your warranty. Go with a company that has been around a while and not a fly-by-night operation.
Read The Fine Print
Whenever you buy any type of insurance product, there are lots of terms and conditions that you must abide by. Car warranties are no different. It is common for people to think their warranty policy covers something only to discover otherwise. Before spending any money, make sure you know what you are buying. This is true for many things in life.
Some things you will want to pay attention to:
- Length: This could be calculated by time or the number of miles driven, whichever comes first. Some warranties start counting from the time the car is first put into service. Others start the clock when the contract was purchased.
- Coverage: Warranties have certain things that are covered or not, called inclusions and exclusions. Pay special attention to the exclusions section. Comprehensive coverage is more expensive than plans that cover only certain parts of the car. Aftermarket warranties allow you to customize your coverage to fit your exact needs and budget.
- Service Restrictions: Will you need to take the car to a specific dealer or service center for repair work? Some companies allow your car to be serviced anywhere in the nation.
- Transferability: There may be extra paperwork, administrative fees, and deadlines for submission when the car is sold that need to be completed or the warranty could be void. Having a transferrable warranty could increase the value of your car when buyers are comparing between two vehicles.
- Cancellation and Refunds: Some warranty companies will let you get a prorated refund of your unused coverage period if you sell your car, it is stolen, or if your car is totaled in an accident.
Closing $ense
An extended warranty can increase the price of your car by thousands of dollars. For over 50% of people, buying the warranty offers zero benefits other than giving money away to the warranty company and getting less in return. This is more so the case if you are buying a car with a reliable track record.
I owned my last car for over 12 years. The only thing I spent money on was maintenance. This included oil changes, flushing the coolant, changing the brake fluid, putting in a new battery, and buying new tires. Take care of your car and your car will take care of you.
Ultimately, buying a warranty is a personal decision. If you do decide you want the extra warranty coverage, do your homework. A car is a big purchase for the majority of people and knowing there won’t be any costly surprises can be priceless.
What do you think about extended car warranties? Have you purchased one before? Was it worth it?