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 supposed a promise that certain defects in the vehicle will be taken care of at no additional cost to us.
But is that really so?
How Much Bang for the Buck?
The data indicate that these extended warranties don’t save as much as we’d like to think.
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 pretty significant 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 from the policy!
Final Thoughts on Extended Warranties
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!
We need to be wise consumers and recognize that though a product may be legitimate, it may not be the best fit for us.
So what’s the alternative? Get out of debt and have your fully-funded emergency fund, of course!
By having an emergency fund of 3-6 months of expenses, you protect yourself against the inevitable cost of car repairs. It’s only a matter of when, not if.
But at the end of the day, those extended vehicle warranties are just not worth the extra charge.