An Automobile Extended Warranty Is Not Worth the Cost

A few years ago, my wife and I splurged and bought a luxury car. That was almost three years ago, and now our four year or 50,000 mile warranty is ending. Now, the car company is offering us two very distinct extended warranty options. We can get a small maintenance warranty or a comprehensive warranty.

The small extended warranty will cost us about $2,000 and will only cover normal preventative maintenance costs such as oil changes, other fluids, scheduled inspections, belts, rotors, wipers, break pads, and labor. The complete warranty is well…complete. It will cover major mechanical breakdowns (except drive train), major component failures, and all the oil changes and things covered by the minimal one. The complete warranty will cost approximately $3,200. Both warranties will cover our car for an additional two years or another 50,000 miles, which ever comes first. God help us if I drive 25,000 per year.

The luxury car my wife and I own only gets serviced every year including oil changes. It runs on some high speed synthetic oil that only needs to be changed every 12,000 miles or so. Changing your oil every 3,000 is a wasteful rip off by the way propagated by the car service companies that is now ingrained into our American culture and psyche.

I called the local dealership, and their normal charge for an oil change and year check up package is $150, assuming that nothing is wrong with the car. There have been only a few repairs that we have had done on the car in the three years that we have owned it. We had to get the tires replaced to the tune of $800, but that was not covered in my warranty anyway. I had to eat that one all on my own. The radio also shorted out the electrical system to the tune of $1,600, but that one was covered under my original warranty. Repairs like that will only be covered on the full extended warranty. But, what are the odds of having another major repair like that in the next two years? What happens after my two years are up? Am I on my own no matter what? What are the odds of having three more major repairs like the radio in order to recoup the cost of the full extended warranty?

Some things you want to consider if you are going to buy the extended warranty for your car is what exactly is covered under the warranty and what is considered fair wear and tear. Normal wear and tear is usually not covered by any warranty, and that is why I had to pay for my new tires. You also want to consider who can see you car under the terms of the warranty. Can you take it anywhere? The answer is most likely no. Does your new extended warranty pay the car repair shop or dealership directly or do you have to pay the bill and get reimbursed? Is there a deductible?

If you base your decisions on the costs versus the benefits that you receive (cost benefit analysis), you can try and understand your options and if the large outlay of cash for only a few more years over warranty coverage is really worth it.

Here’s how I would do the math:
Buy the warranty = $3,200 for 2 years
Don’t buy the warranty = ***$300 (2x oil change), $400 (new brakes), $1,600 (another large broken thing like the radio) = $2,300 total

*** most likely expenses for the two years in question

$2,300 is less than $3,200 so I would choose to not buy the extended warranty.

Consumer Reports calls extended warranties a sucker’s bet. Extended warranties are an insurance policy, and companies do not get rich paying out insurance claims. Most consumers do not even use half the cash value of their warranties.

A better option in my scenario above might be to place the $3,200 you would have spent on a warranty into a mock “escrow” account for when you actually need to make repairs to your car. That way you are paying for exactly the services you are using. A good rule of thumb is that you should save or expect to spend $100 a month on maintenance per car you own. So, keep building your personal escrow account a little bit every month in order to mitigate the chance that large car bills will devastate your monthly budget.

Tagged as: Cars