Ask Stacy — Should I Buy an Extended Car Warranty?

Lamborghini — Twocoms / Shutterstock.com

This week’s reader question is about buying peace of mind:

We purchased a … Ram 1500 four-wheel-drive a year ago this December and want to know if it is worth buying an extended warranty. We currently have a little over 10,000 miles on it.

Extended warranties, also known as service contracts, are pushed heavily by car dealers, with good reason: They make a lot of money on them.

But these contracts also provide some assurance that if some gigantic repair rears its ugly head, your savings will remain intact.

To buy or not to buy? Start by recognizing that these contracts aren’t typically money well-spent. According to a 2014 Consumer Reports article:

A recent Consumer Reports survey found that 55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was just over $1,200. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.

Another finding from the same survey: “Less than 30 percent of all respondents who purchased an extended warranty said they would definitely do so again.”

Still want that warranty? Ask yourself these questions:

1. How reliable is my car?

When I was shopping for my fifth used Mercedes a couple of years ago, the salesman said, “One advantage to buying one of our certified used cars is your ability to buy an extended factory warranty.”

My response? “The reason I’m looking at a Mercedes is they don’t often break. If they did, I wouldn’t be standing here. So it’s unlikely I’ll be paying thousands to extend the warranty.”

The point is, the more reliable your car, the less likely you are to need an extended warranty. While individual cars, like people, aren’t all the same, some makes and models are more reliable than others. To find out how reliable your car is, you might do some research online and see what others are saying. For example, you could check out reviews and reliability ratings at sites like Edmunds.com and Cars.com.

2. What does the warranty cover?

The words “extended warranty” don’t mean a thing until you know exactly what’s covered and what’s excluded. Like health insurance, warranties come with different coverage levels and deductibles. Some are bumper-to-bumper, covering virtually everything. On the other end of the spectrum is a contract covering just the powertrain (engine and transmission).

Before considering any level of service, read the fine print on contracts you’re considering, comparing what’s covered, what’s excluded and the deductibles.

Once you’re clear on both coverage and out-of-pocket cost, bring your real-world experience into the mix. In other words, if the warranty covers only the engine and transmission, how many of those have you had to replace?

Granted, I’ve lost both engines and transmissions in the past, but only in cars way beyond any warranty, extended or otherwise.

3. Is it from the manufacturer or a third party?

Manufacturers’ extended warranties will generally cost more than third-party service contracts, but they offer advantages. For example, your car will be repaired by factory-trained technicians using authorized parts. You probably won’t have to get approval for repairs, or pay for them up front and wait for reimbursement. And you’ll typically be able to transfer the warranty if you sell the car.

Here are links to a bunch of manufacturer extended warranty pages. Click on them to see what’s covered:

4. Did you shop it?

If the dealer is successful in persuading you to buy an extended warranty, that doesn’t mean you should pay the asking price. According to Edmunds.com, dealers typically mark up manufacturers’ extended warranties by 100 percent, so there’s plenty of wiggle room.

When it comes to third-party warranties, do a search for “extended car warranty,” and you’ll find a surprising number of options, although fewer than you would have years ago. The last time I wrote about these things, Costco offered extended warranties. Now they don’t. Other potential sources:

USAA
Credit unions (This link goes to PenFed, but check with whatever credit union you use.)
Car insurance companies (This link goes to Geico, but check with whatever company you use.)

Get several quotes and don’t forget to negotiate.

The 2014 Consumer Reports survey mentioned above revealed greater consumer satisfaction for policies purchased from dealers versus third parties. So a good strategy might be to get a low-ball offer from a third-party provider, then use it as leverage with the dealer.

Important: The world of extended warranties is rife with rip-offs. If you’re considering a third-party company you found with a web search, tread carefully. Check them out thoroughly by looking for reviews, checking with the BBB, etc. And don’t even think of using a company that contacts you via mass mail or robocall.

5. Will it buy you peace of mind?

There are two distinct types of people in the world: those who can’t stand the idea of unexpected expenses, and those who can’t stand the idea of paying for protection they may never need.

I’m firmly in the latter category.

When it comes to something like health insurance, I don’t have a choice. Without it, I could lose everything if I become catastrophically ill.

When it comes to my car, however, there’s nothing covered by an extended warranty that will bankrupt me. So I’m willing to gamble. And these days my odds are better than ever because cars are more reliable than ever.

My philosophy: Insurance is to prevent financial catastrophe, not inconvenience. If you insure yourself to the extent you’ll never lose money, you may never have any money to lose.

I keep my insurance deductibles high, I don’t buy extended service contracts, and I keep a fat emergency fund. So far that’s worked out for me.

Bottom line? Unless you’re the nervous type or have had negative experiences by going without, you’ll probably be better off taking the money you’d pay for an extended warranty and investing it instead.

But if you’re going to get this type of coverage, read the fine print, then shop it hard.

Got a question you’d like answered?

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.

Got more money questions? Browse lots more Ask Stacy answers here.

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