Extended Warranty on a new car. Is it ever a good buy?

Great Debates
1

Let’s say 2000 for the warranty that covers everything. We know insurance is feast or famine. You lose money when nothing goes wrong and save a tan of when something bad happens. On the dealer’s side (assume for a second the extended warranty is sold by the dealer), the pricing is such that when averaged over everyone the dealer will make money. Plus it is cheaper to maintain your car properly than buy the extended warranty and almost all manufacturer defects will be apparent during the regular warranty period.

But warranties assume 12,000 miles per year when is extremely low for many people. What if I drive 25K miles per year? Would it make sense to extend the warranty from a mileage perspective than a time one? But then again, extended warranties only go to about 120K miles. Maybe a water/fuel/oil pump that fails early will be covered but ISTM that most of the failures will be after this mileage especially considering the car (@25K / yr) is only 5 years old.

So would a new car extended warranty ever make sense if you put on a lot of miles?

2

Most likely the opposite, as if you drive lots of miles its most likely open highway type of driving which is very easy on cars. I put 40K a year on for about 5-6 years, my first major item which a warrantee could come into play happened at 150,000 miles, and since it was emissions related it was covered (new entire exhaust system due to a failed California compliant cat), but no extended warranty would come into play for that amount of milage - except for this legally required one which has nothing to do with extended warranties. That car was taken out of service with 312,000 miles on it. (Subaru Outback )

3

The advice I usually see is to put the cost of an extended warranty into a repair fund. No red tape, no nitpicking refusals, etc.
Or just pay for repairs from your savings if you have enough.

4

I was told that if they push the Extended warranty, to say something like “Oh, that car is that unreliable?Maybe I should try another car company.”

On some cars, like Jeeps and Range Rovers, it might pay for itself. But simply not buying an unreliable car in the first place will be cheaper and cause less stress.

5

Ask yourself why the sellers of extended warranties push them so hard (not just with vehicles).

mmm

6

The biggest problem with warranties is that there end up being a lot of hassles and restrictions getting them to actually pay out.

Insurance is always a loser in pure expected value, but it can still be worth it because it makes tail end risks into affordable payments. Most good insurance is well-regulated by the state and while it may not seem fair, rarely exists primarily for the purpose of jerking people around and not paying them in the long term.

1st party warranties are generally marketing for the product. You don’t pay extra for them, but the company has lots of incentives to make them decent to get repeat customers.

3rd party warranties are generally unregulated nonsense and often attempt to pad their profits by getting the money up front and being as difficult to work with as possible when something needs paying.

How much is it going to cost you to be without your car for the extra week that it takes the warranty company to answer the phone, direct you to their approved mechanic (who’s further away and doesn’t have any availability), approve the repair during their short business hours, etc.? If you don’t have a warranty, you can just call around and find someone to fix it right now. If you do, you either forfeit the warranty or pay an extra time and hassle tax, and there’s really no way to know how much that will be until it matters.

7

All insurance has a negative expected return to the consumer. So a good general principle is to insure only large losses that would cause you significant hardship. A corollary to this is that it usually makes sense to have a large deductible - absorb small losses yourself, cover yourself only for disasters.

And remember that it’s not just the economics. The other reason (as described by @iamthewalrus_3 ) is the administrative inconvenience and delay of having to process a repair through an insurance company when they have every incentive to make the process slow and difficult if it saves them a couple of bucks; rather than shopping around with your own cash to get the repair done quickly and conveniently.

8

Consumer Reports suggests that extended warranties on cars is generally a bad idea but might be worthwhile if you’re planning on keeping the car indefinitely. They advise that people instead bank the money each month, using it for repairs as needed or towards a new car if not, but if you’re bad with money, perhaps an extended warranty might make sense for you.

I think I’ve heard that some restrict which repair shops you use for fixing your car, so they may limit your choices.

9

A extended warranty from the dealer can be a good buy for someone who wants to pay for the privilege of not having to worry about repairs. It’s a hassle taking your car to the shop and, for someone who isn’t car savvy, having to decide what should be fixed or not. Taking it to the dealer for warranty repair is often the most convenient, and the dealer may do things like have free loaner cars. So for someone wanting that level of convenience and is willing to pay, then getting the dealer warranty can be worth it. It’s more a “saves me hassle” value than “saves me dollars”.

I’ve heard that you can get extended warranties on new cars at good prices by calling dealerships around the country. You don’t have to buy the Ford extended warranty from the Ford dealership which sold you the car. You can buy it from any Ford dealership. By calling around, you may find one that will sell the extended warranty at a big discount.

I don’t think I’d ever recommend buying a 3rd party warranty. Sounds like there’s big potential for headaches in trying to get repairs covered and reimbursed.

10

I bought an extended warranty for my 2008 Mazda3–but only because the contract promised a refund of my purchase price after 5 years if I didn’t use it for any covered repairs.

The car turned out to be very reliable and didn’t need anything other than routine maintenance. So, when the 5 years were up I took my contract into the dealer. (And here’s the twist…) It turned out that the company offering the warranty had gone out of business, without any notification to any of their customers. BUT, the owner of the dealership was an honest man and issued me a check for the purchase price minus a $60 handling charge (stipulated in the original contract). I walked out with $1140 in my pocket, and I ended up buying my next car from the same dealership. I didn’t get an extended warranty on that car because they were no longer had the money-back offer.

11

There are many problems with extended warrqnties that most people do not consider:

  • Asymmetric Information. The car company has a lot more data on what fails and how expensive it is to replace than you do. Therefore, it’s very hard to tell whether or not an extended warranty is a good value.

  • They get your money to use in advance. You pay for an extended warranty up front, but the company doesn’t risk the costs until the primary warranty is over. That may mean they get to use and invest your money for 5-10 years before they have even a risk of paying out on the policy. Or look at it another way: If you took $1,000 and instead of buying a warranty you invested it, when the main warranty ends you would have a lot more than $1,000 in your repair account.

In engineering, the reliability of a complex product can be depicted as a ‘bathtub curve’. Failure rates are high at the beginning, due to manufacturing defects and possibly design flaws. Then as all those get worked out, the failure rates drops and stays low for a long time. This is the ‘normal lifespan’ part of the curve. Then eventually, failure rates start to rise as parts naturally wear out. Hence the bathtub shape, or a ‘U’ with an extended flat bottom.

The factory warranty is designed to cover you in case of product defects or workmanship, and lasts until the car reaches the ‘normal wear’ phase of low failures (the bottom of thr tub). The extended warranty is designed to cover this area, where failures are low anyway, and they always expire before you get to the ‘end of life’ rise in failures due to normal wear.

In other words, you are paying for insurance which only covers the period during which the product is the most reliable.

Now, some parts wear out earlier than others, so you’ll note that car extended warranties are often very specific about what they do and don’t cover. Again, asymmetric information. The car companies know more than you do about what’s likely to fail early, and they’ll exclude those from the warranty.

The only time an extended warranty makes sense is if you know something about your usage that the other party doesn’t, and can therefore take advantage of your own asymmetric information. For example, if an iPhone extended warranty covers you if you drop your phone in water and you have a toddler who likes to throw phones in the toilet, maybe the extra warranty is a good idea. Every case is different.

My advice is this: Open a bank account specifically for repairs. Every time you are offered an extended waeeanty refuse it, but put the money it would have cost into your repair account. That account should grow over time, because the repairs on any products will drain your account more slowly than deposits of saved warranty money will grow it.

That would also be a good account to use to start saving for huge repairs you know are coming, such as replacing a roof on your house, buying new appliances at end of life, etc.

12

It also depends on who is offering the warranty. I’ve heard that you should only consider a warranty offered by the manufacturer, and to stay away from warranties sold by third-parties.

13

You seem to be under the assumption that an extended warranty bought from the dealer is like a manufacturers warranty, i.e- they fix it, period, with no arguments or costs to you. In most cases, a dealer warranty is not like that.

14

Anecdote time: In 2005 I bought a Toyota Prius. I ended up getting the extended warranty for the electronics. I figured there was a lot of electronics in it all of which would be expensive. As I recall I paid $600 for it. I ended up with repairs costing $1150 which were covered. Turned out LOTS of things were electronic that I didn’t know. 3 times the water pump died (why was that electronic?), a headlight self leveling mechanism, and something else which I can’t recall at the moment. Turned out to be worth it, but as mentioned above it forced me to take it to the dealer for repairs. I wonder what they would have cost at my local repair shop.

15

Where is this Mazda dealer located? I’ve bought three over the years from three different Mazda dealers and none were what I’d call “ethical” or “honest”. But I have loved all the cars and will be buying another one soon!

16

Del Grande Auto Group in San Jose. I can’t speak for how “honest/ethical” they are today (my Mazda3 warranty story is from 2012 and I bought my CX-5 in 2014), but I’m satisfied that I got a fair deal buying both vehicles from them.

17

Warranties, like insurance, are a gamble, and the house always wins. If a warranty had an expected financial benefit for the buyer, companies wouldn’t offer them. Sure, you might come out ahead occasionally, just like you might win the lottery or a big jackpot. But on average you will lose more than you win.

There are other considerations though. People are loss averse. We count future losses as “worse” than future gains of the same size, so a warranty might be psychologically more satisfying to some people even if it technically isn’t the best financial decision.

There’s also the fact that we have no ceiling on gains, but a very real floor on losses, and hitting that floor is catastrophic. A rich guy would be a fool to buy a car warranty, when he can cover any unforeseen bill that might crop up.

But a poor person may not be able to cover any substantial car repair, and without a car they can’t earn money, so it’s a vicious circle/double whammy. It might be a good idea for that person buy a warranty, even knowing it will cost them more than they ever stand to benefit from it. One of the many ways it’s expensive to be poor.

18

The only warranty of that sort that actually paid off for me was a home warranty on appliances. As soon as cost/benefit approached equal, I cancelled it. The repair cost for my washer alone without the warranty would have been more than the annual premium.

19

I’ve bought extended warranties on all my new vehicles, developed good relationships with car mechanics who do warranty work, was aggressive in my demands the warranty take care of whatever needed fixing, and always… @ 50k and 99k… took it in to my mechanics and said ‘find and fix everything the warranty will cover’.

I just treated warranties, mentally, as pre-paid repairs and made damn sure I got my money back and then some. But if you’re not going to be aggressive on this stuff, if you just wait until something goes wrong and hope the warranty covers it, or if you roll pass 100,000 miles w/o giving that warranty a second thought, don’t waste your money. The only way to come out ahead… or even… is to actively use it as a discounted repair program.

20

Those actually are good ones, especially for the first year of ownership and older appliances. Our relator bought us one of those for our first year and it paid for a dishwasher repair and a new garbage disposal.