Ask Stacy — Should I Buy an Extended Car Warranty?

Lamborghini
Photo by 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:

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?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here.

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.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
9 Houseplants That Remove Toxins From Your Indoor Air
9 Houseplants That Remove Toxins From Your Indoor Air

These plants may also do everything from reduce the amount of dust in your home to improve your productivity.

7 Secret Perks of Individual Retirement Accounts
7 Secret Perks of Individual Retirement Accounts

IRAs come with bells and whistles that many other accounts lack — including some perks you may not know exist.

11 Foods That Can Keep for Years
11 Foods That Can Keep for Years

These are some of the longest-lasting groceries you can buy.

15 Painless Ways You Can Cut Costs in 2021
15 Painless Ways You Can Cut Costs in 2021

Follow these tips to save, so you’ll have money for things that really matter.

10 Common Ways Seniors Get Scammed
10 Common Ways Seniors Get Scammed

Here’s what to watch for to make sure you don’t fall prey to some of the biggest rip-offs targeting seniors.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
7 Kirkland Signature Items to Avoid at Costco
7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

How to Buy Gas At Costco Without a Membership
How to Buy Gas At Costco Without a Membership

The warehouse club often has some of the cheapest gas in town. Here’s how you can get it as a nonmember.

10 Things to Stop Buying If You Want a Clutter-Free Home
10 Things to Stop Buying If You Want a Clutter-Free Home

If you like to keep things simple, avoid these purchases.

If You Find This Thrift Shopping, Buy It
If You Find This Thrift Shopping, Buy It

Vacuums from this brand can last a half-century, if not longer — and they’re hot on the resale market.

A Simple Way to Silence Robocalls Today
A Simple Way to Silence Robocalls Today

A few steps can keep your phone from ringing when a spammer calls.

This Company Makes the Best Tires in America
This Company Makes the Best Tires in America

Driver satisfaction with tires is at an all-time high, but one brand stands out.

Can I Switch to Spousal Social Security Benefits When My Ex Dies?
Can I Switch to Spousal Social Security Benefits When My Ex Dies?

Knowing when to claim can help you maximize benefits.

36 Things That Will Be Obsolete Soon
36 Things That Will Be Obsolete Soon

The writing is on the wall for dozens of things we have grown up with.

17 Surprising Things You Can Sell for Extra Money
17 Surprising Things You Can Sell for Extra Money

You probably don’t realize these items are worth decent cash.

8 Things You Should Always Buy on Amazon
8 Things You Should Always Buy on Amazon

The giant retailer shines when it comes to these things, from basics to hard-to-find specialty goods.

This Health Issue Can Hint at Dementia Years in Advance
This Health Issue Can Hint at Dementia Years in Advance

One type of pain is especially associated with cognitive decline.

8 Federal Income Tax Breaks for Homeowners
8 Federal Income Tax Breaks for Homeowners

Some of these deductions and credits are available to a wide swath of homeowners.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

5 Ways to Fill Your Pantry With Free Food
5 Ways to Fill Your Pantry With Free Food

Anyone can take advantage of these resources.

9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

10 Types of Retirement Income That Are Not Taxable
10 Types of Retirement Income That Are Not Taxable

There are lots of things Uncle Sam can’t touch — so long as you play by the rules.

6 Reasons You Should Stop Hiding Cash at Home
6 Reasons You Should Stop Hiding Cash at Home

Stashing money around the house is anything but harmless.

These 5 States Are the Most Expensive Places to Retire
These 5 States Are the Most Expensive Places to Retire

If you expect to have modest retirement income, you may want to avoid spending your golden years here.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.