Saturday, February 12, 2011

Should You Buy an Extended Warranty? Probably Not.

Extended warranties try to sell you " peace of mind" .  When anyone tries to sell you peace of mind, keep one hand on your wallet.

I have written in the past about extended warranties.  For the most part, they are not worthwhile, although many people swear by them.  These same people buy brand new cars and finance them, or try to convince themselves they "got a deal" on an airline miles card.

Financial responsibility and acumen is not about getting fancy deals and scoring some complex guaranty or warranty.  It is about simplifying your finances, not complicating them.  And the more complicated you can make any financial transaction, the easier it is to rip off the consumer.

Extended warranties are sold on FEAR - fear of ungodly repair bills when some major component of your car breaks down - such as the transmission or engine.  But in reality, for most well-made cars, such things rarely break down, except after years of service - when even extended warranties have expired.

And as I noted in my Hidden Warranty posting, oftentimes if such major components break out-of-warranty, most companies will offer repair assistance in any event.

But the long and short of it is that an extended warranty is a bet - and we know than gambling is a very, very bad idea unless you are the house.  The house always wins, as they set the odds so they win.  So the companies offering extended warranties always set the odds (the price of the warranty) such that they take in more money than they would ever pay out in repair bills.

So on average, if you pay $2000 for an extended warranty, the company is betting they will pay out $1000 or so.  That's not very good odds, is it?

Plus - and this is the big thing - if a repair bill of $3000 to $5000 scares you that much (and repair bills seldom go higher than this) then maybe you need to re-think your priorities.  As I noted in my "When Should You Drop Collision and Comp?" posting, if you have a car worth $10,000 or less, you should be able to drop collision and comp coverage.  And if you think $10,000 is a lot of money, you need to re-think your priorities.

Simply stated, most people own too much car for their income.  They buy $30,000 cars and they worry and fret they will be damaged or break down, because it is the single largest thing they own.  If this describes you, I would suggest buying a good secondhand Toyota for $10,000 and putting more money into the bank.

People like to crow about how they got a "free transmission" out of their extended warranty and thus "saved $3500" on a transmission repair.  However, since they paid $2000 for the extended warranty, they actually saved only $1500.  And since a local independent mechanic could have installed a rebuilt or used transmission for $2000 or less, they really save nothing.

If you put that extended warranty money in the bank where it can earn interest (or into a mutual fund or something) you will have that money later on if your car should break.  And if your car doesn't break - well you come out way ahead of the poor sap who bought an extended warranty.

However, I realize that some of you are so paranoid about a $3500 repair than you have to insure even that trivial loss (how pathetic!) and will go out and buy one of these warranties anyway.  If you do, here are some tips:
1.  Buy only the factory warranty:  And make sure it is one, as some car dealers will try to sell 3rd party warranties and say they are factory warranties.  3rd party warranties are nearly worthless, as the companies that back them go out of business, or require such onerous paperwork that you can never collect under them.  With a factory warranty, at least, you go to the dealer and if it is covered, they pay with no hassle. 
2.  Negotiate on Price:  These are highly marked-up and the salesmen get huge commissions, so don't be afraid to beat them up on price. 
3.  Never respond to Postcards or Phone Calls:  Con Artists send out cards or robo-calls, claiming your car is about to go out of warranty and that they can sell you an extended factory warranty.  Usually they just take your money and you never hear from them again.
But the best defense to unexpected repair bills is to buy a good quality car (and this, alas, usually doesn't mean a Chevy Malibu or some other badly made American car) and drive it carefully and maintain it properly (including all fluid changes).  Put the warranty money in the bank and save it for a rainy day if something should break.  Chances are, you'll come out way ahead.

People who are risk-averse rarely come out ahead.

And if you are being risk-averse over a $3500 repair job, ask yourself how you'll ever get ahead in life.