Is an Extended Car Warranty Worth It?

This is part of a seven-post series discussing our journey to buy a new car. Scroll to the bottom of this post to explore the entire series. The series took a brief break while I wrapped up my transaction with Hertz, but I’m ready to wrap up the series this week with a Rent2Buy review. But first, let’s look at warranties.

When it comes to extended car warranties, it seems like people fall into three groups (remember buying rental cars?):

  1. Those who never want to worry about another repair again and are willing to pay for the privilege, every time;
  2. Those who are willing to consider warranties on a case-by-case basis, shop around, and run cost-value analysis to figure out if it makes sense;
  3. And those who believe that warranties are a ripoff 100% of the time and want no part of the game.

Where do you fall?

A Bit Like Health Insurance

Buying an extended car warranty is a bit like buying health insurance (more on that topic in the coming weeks).

There’s a coverage period (3 years, 6 years, etc.) during which repairs (i.e. “sicknesses”) are covered based on the level of coverage (how good of a plan you purchased). The basic plans cover major repairs, while the more expensive plans cover almost everything that could go wrong. In most cases, there’s also a small deductible for each repair ($50, $100, etc.).

The plans can be “managed care,” where repair shops are specified by the warranty issuer, or more like a PPO or HSA approach, where any shop is fair game. In most cases though, you have to call the warranty provider ahead of time (like pre-certification for surgery) to get approval for the repair.

Finally, shops are either paid directly, or you are reimbursed for the repair after it’s complete.

Are They Worth It?

If you’re wondering, I’m in group #2. I think warranties are never “good” or “bad” deals, but should be looked at in the overall scheme of things, considering:

  • the car you purchased (mainly reliability and previous use),
  • your monthly car budget,
  • your available savings if something were to break,
  • how much you rely on the vehicle being covered,
  • how long you plan to keep the car,
  • and obviously–the features and price of the warranty being purchased.

Yes, warranty issuers do make money. Is that really a surprise? It’s very likely that the average person will never recover the full value of their premiums.

But if you analyze your personal situation and elect to treat this as another form of insurance you own, it might make sense. After all, a single A/C failure, transmission crash, engine blowup, etc. can easily run over the policy’s premium value in a single repair.

What Do You Think?

I have a couple of other points to make, but I have no doubt that I’ll get them into the discussion below. This should make for an interesting topic!

Please share your experiences with car warranties, your thoughts on buying and using them, and anything else you might want to say!

This is part of a seven-post series on our new car journey. Below are links to posts that have already been published as part of this series:

  1. Our One-Car Experiment and Car Decision
  2. How to Sell Your Car on Craigslist
  3. Using Consumer Reports to Select a Car
  4. Would You Buy a Rental Car?
  5. Should You Buy a New or Used Car?
  6. This Post
  7. Review of Hertz Rent2Buy

Photo by Axel-D

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4 thoughts on “Is an Extended Car Warranty Worth It?

  1. Excellent post! Here are a couple more thoughts on buying a warranty:

    Usually the absolute worst place to get a warranty is at the dealership (and most people think this is the ONLY place to buy). Dealerships sell them because they can bake in a ton of margin. If you do buy from a dealer remember contracts are negotiable and consider searching online for one as well.

    Also, price is obviously a big consideration and i’m a proponent of option#2 (shop around and do a cost/value analysis), but be sure to consider the other biggest factor: picking a reputable company with a good track record and reviews.
    .-= Car Negotiation Coach´s last post: How to organize financial documents for your car =-.

  2. I’m in group #2. But I remember buying my first new car on my own (after getting an old hand-me down and getting a used car that had a bad repair record), I also bought (via the car loan) a 7-year, 70,000 mile warranty.

    When I told people at work, some laughed at me and said it was a waste of money, but I remember one guy (who was once a mechanic) saying, that’s a good idea. His argument was, most people can’t fix modern cars (even in 1997) without having additional tools and access to computer diagnostics. Plus, he knew I could change oil on an old car, but also knew I wasn’t 100% mechanically inclined.

    I never had to use it for the few years I had the truck, because it was a Toyota and did well for me. When I traded in the truck, I received the full price back on the warranty, because I didn’t hit 36,001 miles, so I never used the extended warranty, and also hit 33 months of ownership.

    But I also bought a 7 year, 100,000 mile warranty with a 2003 Nissan Xterra (best care I owned at that point), but that particular model had issues with the parking brake and A/C. There wasn’t a recall, but those were pointed out in Consumer Reports magazine (I’m a fan), but they didn’t really pop up until 2004, 2005 in the magazine.

    Well, around 2005, I started having A/C problems. Between 05 and early 09 (when I hit 100,000 miles–I wracked up a ton of miles for two jobs I had), the XTerra went in once a year for A/C repairs that cost $800-$1000! Seriously, if it weren’t for the fact that CR rated everything else fine, I might’ve gone with another vehicle.

    There were other things that tend to break down over time, like a fuel pump, but it was covered! I was only out around $100-200 for each repair. So, that $1000 warranty more than paid for itself. I guess the only down-side would be tht it was worked into financing, so I’m sure it cost WAY more than $1000.

    Now, I recently bought a used Mitsubishi Raider (bad gas mileage, great truck otherwise), and since it’s a re-skinned Dodge Dakota, Mitsubishi was willing to give a 60,000 mile, 5-year warranty to try and sell more vehicles. Well, they didn’t, but Enterprise liked it. The used car lot I bought it from (for about $3-4,000 less than comparable used trucks, since it wasn’t popular), had gotten it at auction from Enterprise.

    What I’m happy about, is that I can still take it over to Mitsubishi for a warranty repair. And considering the lights/blinkers are acting up, it won’t cost me the $250 quote I got at a repair shop.

    Sorry this post is long, but one more thing… since I’m not happy about the poor gas mileage of around 13 miles in city, and even though I work from home, it adds up driving around locally, trust me. Especially with gas prices going up again.

    So I’m planning on getting the warranty repair work done, cleaning the truck up, and seeing if I can sell it online at Craig’s List. It’s a great truck, cheaper than even a used Ford Ranger, Dodge Dakota, etc. Esp. Toyota or Nissan, so I know someone wants a great deal on a truck. And you know what, most trucks don’t get great gas mileage. This was a truck purchase I didn’t research enough, and I just wanted to drive a truck again.

    With the money I’ll hopefully make in a sale, I should be able to pay off my loan and look into a “new” used car, likely a Nissan Rogue. I’ve done TONS of research, now it’s time to make a decision. I used to buy new, but it just doesn’t make financial sense to, so I’ll stick with used and rental cars.

  3. I just bought a brand new car, which was a new model year for the motor and transmission. I decided to go with the extended repair warranty, which was for the lifetime of the vehicle.
    • The dealer will be getting a total of about $780. (That’s an extra $13 a month I’m paying over the 5 years of the loan.)
    • I plan to keep this car until it falls apart. I have done this with each of the cars I’ve owned, and judging by my past experiences with similar cars, this could easily be for the next 10 years.
    • Also judging by my past experiences with similar cars, after about 6 or 7 years, I’ll start seeing some failures on such things as the heater, the A/C, automatic windows, miscellaneous gaskets, shocks, etc. Each of these failures in the past cost me around $300 to $500 per incident. Just two or three such incidents will easily equal what I will have paid for the extended warranty.
    • If the engine and the transmission prove to be less than reliable, that $780 will look like an even better deal.

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