Is an Extended Warranty Worth the Price?

A Consumer Reports survey cautions that despite the hype dealers give extended warranties, the added benefits probably aren’t worth the costs. According to the report, consumers paid out an average of $1,000 and saved only $700 in repairs.

The trick is that as vehicles have become more reliable, the likelihood that they will need extensive repairs for a "nightmare" scenario has decreased. Therefore, an extended warranty is insurance for a situation that will probably never occur, or — as Consumer Reports put it — it’s like betting against the house. The game is always rigged so the house reaps the reward because consumers tend to overestimate how much of a safety net they need.

Does this mean all extended warranties are bogus and trying to stay on the safe side is foolish? Of course not. In fact, there are probably plenty of car buyers out there who've had their behinds saved by an extended warranty. However, there are other options for emergency automotive repairs, such as putting the money you would have spent on the warranty into a mutual fund.

Let us know what your experiences have been with extended warranties. Will you buy one with your next car?

Extended Warranties: A High-Priced Gamble (Consumer Reports via The Consumerist) 

Comments

[ziggy]

I bought extended warranties on two vehicles and never had to use either one. One was a Toyota and the other was a Honda. What was I thinking? I guess it was $1400 for peace of mind.

[Jay]

I got one with my previous vehicle and it worked out great. But this was only because I was purchasing a used car 4-5 years old and I didn't include it my monthly car payment. I found out I would pay more for the warranty in intrest if it gets financed thereby truly negating the value of it. Plus if you finance a vehicle like this for 48-60 months, you will probably experience some problem(s) that may exceed the cost of the warranty regardless of whether its the Japs or Detroit's finest.

[Sam]

The issue is just an advanced microeconomics problem. All insurance companies charge more in premiums than they pay out in claims. If you divide the premiums and claims by the number of participants, the ratio of premium to claim remains the same. It is how they stay in business and make a profit. Using this article's reasoning on whether it is worth it or not to purchase the insurance, why would I want to purchase health insurance? Why not put the money in a mutual fund in case I get sick? Extended warranties are an insurance product in a competitive market. If there were excess profits being made on the warranties, more companies would enter the market (and maybe they are), which would drive down the price of the contract so that the insurance company would make a normal profit.

There are equations you can use to decide whether to purchase insurance at a given price. The inputs involve the probability of something bad happening and the incremental cost of insurance. It would be neat if someone made a form with some easy inputs to compute whether I should by a warranty or not. Car.com, get on it.

[Bowrider]

No

[Dave]

Maybe there aren't excessive profits - and its a bad deal - it may just be an inefficient concept. Administering the insurance and the claims may be so costly that its both a bad deal for consumers as well as not excessively profitable. That's what I suspect.

with that said - I have a chrysler minivan with all the bells and whistles, motorized doors, NAV(already replaced once - under the normal warranty), heated seats, rear seat DVD player, etc...

I plan to keep this thing well past the 3/36 original warranty - so we just extended out 4 more years - it cost a lot - but I don't think that reliability has gotten so good that I won't get a few door motors, power windows, and another NAV unit by the time this is done.

Engine/Transmission - maybe those are far more reliable than they used to be - but my Ford Mustang has power window problems, my Cadillac DTS has regular power window failures and my Chrylser Minivan is due for a long nightmare of gadget breakdowns.

I love my cars and all their gadgets - but they are expensive - that's life.

[ilija]

A good friend of mine has 4 years old BMW M3 and 6 years old Audi S4. He bought extended insurance for both cars and audi ones paid off more than twice he told me. As for BMW he had so many malfunctions, some of them were serious, that he bought insurance as soon as his warranty expired. In general if you have German cars buying extra insurance helps. My previous car was Corolla and worked as a dream with minimum maintenance. I have never tought of buying extendid insurance. My current car is G35 and after two years the car is solid as a rock with no issues. I have another friend with S4 and he has so many problems with his car.

I also heard that Corvette Z06 is more relailable than Porsche.

[Adrock]

"The game is always rigged so the house reaps the reward because consumers tend to overestimate how much of a safety net they need."

This doesn't seem right to me. I always thought consumers usually underestimate how much of a safety net they need. If they are overestimating in this case, its probably just due to outdated notions of vehicle quality. But in situations such as car insurance, health case, etc, I thought most people would skimp on total amount of coverage where possible. I dunno, maybe I'm wrong.

[Sexy Driver]

I have extended warranties on both my bmw and on my Range Rover. I didnt buy them at the dealership because their prices were too high, so I began searching the net for more info. I found Aftermarket Auto Warranties and bought the same contract, coverage as the dealer had offered me for $1000 less. I've filed claims and have gotten repairs paid. Overall, It's economical choice to buy a service contract and insure yourself against unexpected, costly repairs. Try checking with them before you buy
http://www.aftermarketautowarranties.com

[J]

A 07 Civic, and the way I baby her. Do I really need the extended warranty?

[Sriyani]

I like this method.
.................

Sriyani

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[Warranties-For-Less]

Agreed,

I was looking for a warranty for my BMW and I could not find what I needed until I found Warranties-For-Less. Interesting to learn I could become a free distributorship for extended warranties, so I registered, then started to finish my due diligence on getting a warranty for my BMW.

Once I compared all the available warranties on the market, it became even more interesting to look at the opportunity side of distributorship for more reasons than just wanting to save over a thousand dollars on my own warranty. Yes, you can sell to yourself, and if you do, you will soon learn that this warranty actually pays me to enjoy the benefits and the peace of mind knowing I am covered. An engine or transmission for a BMW is $3,000. to $5,000. cost and I already had over 100,000 miles on mine, trouble free, so I wanted to keep it that way.

Long story short, this is a no lose situation, first, I got my $2,000.00 Cash Gift Card, then I got a commission check or rebate of $500.00 on my own purchase, and then to my surprise, I am currently getting just over $130.00 per week in commissions because of this unique and powerful compensation plan. Bottom line, I can see myself pulling in six figures a year with only passive effort, so if you can find a warranty that pays you to enjoy the peace of mind, it won't offer as much as Warranties-For-Less.com offers.

Peace of mind, plus financial freedom, all I can say is WOW!

[JJJR]

Extended warranties are always a good deal for the seller (not so for the buyer) as they often produce obscene profits. Worse, costs are usually set by what the traffic will bear rather then a formula calculated by losses such as a home insurer might use.

Here’s an example, before moving into our new home we had to purchase appliances for the kitchen. Rather then argue with the sales person I agreed to purchase an extended warranty on all 4 pieces. Individually the cost didn’t seem to bad but when I got home and calculated the total price ($750) it became very obvious why they push so hard to sell the warranty.

The warranty order was canceled shortly thereafter. Long story short, 5 years later not one product failure. Even if I’d had a problem the $750 saved would have easily covered the replacement of any one piece with the exception of the refrigerator.

OK so cars are more expensive items but so are the extended warranties for same. It’s a proven fact that most defects occur before the standard warranty expires. Certified used cars may be worth the extra cost if the vehicles standard warranty has expired but that is dependent on the premium the dealer is asking.

Let the buyer beware, it always pays to do your homework before making a major purchase.