Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about extended warranties; specifically, whether it makes sense to purchase one when you buy a new or used car.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
Got a question of your own to ask? Scroll down past the transcript.
For more information, check out “Ask Stacy: Are Service Plans and Extended Warranties Worth It?” and “14 Insurance Products That Are a Waste of Money.” You can also go to the search at the top of this page, put in the word “warranty” and find plenty of information on just about everything relating to this topic.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Today’s question comes to us from Walter:
“We recently purchased a Ford pickup and wondered whether we should also have purchased the extended warranty. The dealer was pushing it really hard. Is it a good idea or bad?”
Well, Walter, I’ve got three things for you:
Thing No. 1: What’s an extended warranty?
First, let’s talk about what extended warranties are. Also known as service contracts, they pay for major repairs to your car after the traditional warranty has expired. Some cover a lot, others not so much.
Thing No. 2: Are they worth it?
Whether an extended warranty is worth it depends on lots of things, but let me give you some statistics.
Consumer Reports did a survey a few years ago, and here’s what they found: More than half of the people who bought an extended warranty never used it. Of those who did use it, most of them spent more on the warranty than they saved on the covered repairs.
And only 30 percent of the people who bought an extended warranty said they would do it again. So, as you can see, these don’t tend to work out that well.
Obviously, if you’re one of the people who uses it, an extended warranty can be a lifesaver. But that leads me to my last point.
Thing No. 3: Read the fine print
Extended warranties differ widely. Some of the things that could happen to your car may not be covered, so you’ve really got to read the fine print.
Another thing many people don’t realize: You don’t have to buy the service contract the day you buy the car, nor do you have to buy it from the place you bought the car.
Shop around. Some credit unions offer these policies; so do some insurance companies. And they may cost less than the one that dealer is pushing. Something else to keep in mind: Extended warranties often have a 100 percent markup, so there’s a good chance you can negotiate, especially with the dealer.
Bottom line: Personally, I’m not a fan of extended warranties. I’ve always said that if you insure yourself to the extent you’ll never lose a penny, you may never have a penny to lose. My advice is to shop for reliable cars, have them thoroughly inspected before you buy, then take the risk and self-insure.
Walter, I hope that answers your question.
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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.
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.
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