A client recently asked me if he and his wife should renew the warranty on their vehicle. Because of the cost-benefit analysis on such warranties, I answered no.
A warranty is often a nice little peace of mind when you buy a car. Especially if the car is used, having that extra reassurance backing up the transaction can tip prospective buyers over the fence into purchasing.
This is understandable. Cars these days are incredibly complex machines, and few of us can work on them at home any more, even the most handy of us. The warranty is a promise that certain defects in the vehicle will be taken care of at no additional cost to us.
But is that really so? Do these extended warranties save us money at the end of the day?
The data indicate otherwise.
A survey from Consumer Reports reveals that the average cost of an extended warranty on a car is $1,200. A majority of buyers who opted for an extended warranty never used it. Even for those who used the warranty, they still paid several hundred dollars more for the coverage than they would paid out of pocket have for the repairs.
Consumer Reports found an average net loss of about $375 among those who used the warranty. For those who didn’t use it, the net savings was zero.
In essence, that translates to a profit for the business selling the extended warranty. Have you ever thought about why those unknown extended warranty companies continue to hound you month after month about the “last chance” to get your extended warranty?
The company is making a pretty solid bet that it will profit off the policy!
There’s nothing immoral about making a profit selling a legitimate product, but when we’re thinking about ways to save money, it’s better to opt for the things that keep more of our money in our own pockets!
So what’s the alternative option? Get out of debt and have your fully-funded emergency fund, of course!