Extended Warranty = Raw Deal

Are Extended Warranties Worth the Cost?

You go to the dealer, find the car of your dreams, and then….the dealer offers you an ‘extended warranty.” You ponder for 10 minutes, then, in a feat of decisive jubilation, resolve to buy it.  But did you make a good deal?

Consumer Reports tells us that new-car extended warranties are usually poor deals. Sixty-five percent of more than 8,000 Consumer Reports readers surveyed by the Consumer Reports National Research Center earlier this winter said they spent significantly more for a new-car warranty than they got back in repair cost savings.

Extended Warranties Benefit the Car Dealers

Extended warranties are money-makers for dealers, especially in the ever more competitive auto sales markets.  On average, dealers collected around $800 on each extended warranty they sold.

In the Consumer Reports survey, respondents cited warranty costs of $1,000 on average that provided benefits of $700 — an average $300 loss. Some 42 percent of extended warranties were not used, and only about a third of all respondents used their plan to cover a serious problem. About one in five respondents (22%) said they netted any savings. Seventy-five percent did not buy extended warranties at all.

Extended warranties were, however, a better deal for those who bought more troublesome cars scoring lower in CR’s reliability ratings, such as those from Mercedes-Benz. Still, only 38 percent of Mercedes-Benz owners said they saved money. The average loss was $100.

Lexus and Toyota owners lost the most money: $600 on average for Lexus and $550 for Toyota. Owners of Pontiacs and Jeeps broke even because on average they had covered repairs that equaled the warranty cost.

Alternatives to Extended Warrantees

This may be obvious, but still, experts suggest, among other things, shoppers put the $1,500 to $2,300 they might spend on an extended warranty into a money market savings account or mutual fund instead, to insure against unlikely significant repair costs.

What Can You Do?

For consumers who want absolute peace of mind and don’t mind paying for an extended warranty, Consumer Reports offers the following advice:

• Don’t feel pressured: You don’t have to buy an extended warranty at the same time you buy your new car. Instead, shop around six months before the vehicle’s factory warranty runs out.
• Talk to a Mechanic: Ask for and have a trusted mechanic review sample contracts before buying.
• Bargain hard: sales commissions can be large.

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