Funny about Money

The only thing necessary for the triumph of evil is for good men to do nothing. ―Edmund Burke

Do you need an extended auto warranty?

venza2Okay, so our conversation turned, briefly, toward extended car service warranties offered by various third-party dealers. For a time, Costco offered such a warranty, but canceled the program because (says Costco) they couldn’t sell enough of them to make it worthwhile. This may be attributable to the fact that at least some of them were serviced by Century Warranty, which has a fine mob of angry consumers bellyaching about it.

Chuck and Pete, down at the shop, felt an extended warranty can be a good buy — especially if something goes wrong with your junker.

However, the operative word there is IF. Not just “if,” but also “how much.” Some of their customers’ warranties, which they trotted out for me to inspect, were very pricey — in the range of $1,500. The men felt these customers had gotten their money’s worth, though, because repairs on their cars also ranged around $1,500 to $2,000.

But…but…waitaminit. What kind of car do you drive? When did you last have a one-time hit of $2,000 on your Toyota or your Honda? The Dog Chariot — A Toyota Sienna — ran for 16 years and never once had a $1500 bill, to say nothing of two grand. I thought $500 was staggering…and that was for major upkeep.

Let’s go on over to Consumer Reports. Even though we’ve grown skeptical of their specific product recommendations (this is the outfit that thought Samsung top-loading washers were just grand…), when they dispense general information they’re still pretty credible.

CR calls the extended car warranty “an expensive gamble.” That very term drifted into my clouded brain as Chuck and Pete were talking about the things. The median price of these policies is about $1,200, but, says a  CR membership survey, “55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy.” Sooo….that was twelve hundred buckolas down the drain, for each one of those owners!

Doesn’t get much better for the people who did get some payback: “Among survey participants who used their policy, the median out-of-pocket savings on repairs covered by extended warranties for all brands was $837. Based on a $1,214 average initial cost, that works out to a net loss of more than $375.”

Whether you’ll get any use out of this pricey instrument depends on the brand of car you buy. If the maker has a reputation for high reliability, then (duh!) you’re a lot less likely to use the coverage; if the clunk starts life as a clunk, then a warranty might pay for itself. Less-reliable brands include BMW, Chrysler, Dodge, and Mercedes-Benz; not surprisingly, the cost of warranties for these vehicles is high. Meanwhile, Honda, Subaru, and Toyota owners are far less likely ever to use their warranty coverage, and so tend to be the least satisfied with their gamble.

What the heck. If you’ve got $1,500 to bet on the come, you could have a heck of a lot more fun with it in Vegas than down at the car repair shop!

Edmunds is more measured in its remarks about extended warranties. It doesn’t exactly inveigh against them. As a matter of fact, Edmunds apparently hasn’t published an article on the subject since 2012. But when it did, the article was a good one. Go through the piece and answer, for yourself, the hypothetical questions they suggest you consider. Dave Ramsey, having read the CR piece, suggests you “just say no” to the things and instead set aside 50% of the warranty’s cost as a car-repair fund.

Since your car dealership’s “financial manager” salesman will try to get you to roll the warranty’s cost into the loan, any such purchase will mean you’ll be paying interest on this insurance policy.

Thus you’d be far better off to take the amount of the policy’s cost and stash it in a savings account. If you don’t have it on hand, figure out what the monthly payment plus interest would be and simply arrange an automatic monthly transfer from checking to savings. Before long you’ll have enough to cover repairs — especially if you’ve bought a reasonably reliable vehicle.

Here’s a guy who, way back in 2011, paid $2,380 (!!!) for a five-year Costco policy through Century. So…how much would you have to set aside to pay $2,380+2.2% interest, the rate tacked onto the Toyota loan Bell Road’s guy tried (for over an hour) to corral me into buying?

That would be $41.92 a month. Not an outrageous figure — most of us could afford that much. A $2,380 repair bill for your car would be a surprising chunk, especially if you’ve bought one of the “reliable” brands, and especially if the car comes with a new-car or “certified used” warranty that covers the drive train. The drive train is where you’re likely to have the big expenses — though of course who knows how much the computerized stuff will cost to fix. In the course of a year, you would have put aside over $500, which would cover at least one substantial repair.

That Sienna would run for an entire year, often, without any repair bills other than the ordinary maintenance: oil changes, windshield wiper replacement, and the like. These most surely did not add up to $500 a year. Assuming you lucked into a decent car (and chances are higher with newer vehicles) and assuming you used your car-repair stash only for really large bills, in five years you could have $2,500 set aside.

And…really…if you’re ever faced with a $2,500 car repair bill, isn’t it time to trade the thing in?

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2 Comments

  1. My husband and I bought a 2013 Subaru WRX with 9k miles and a reconstructed title. The extended warranty added $ k to the purchase price of $22k. We’ve used it twice so far (to repair things that were obviously caused by the accident that branded the title) and the repairs totaled over $7k. I have never been so thankful that someone else assumed the risk associated with a salvaged car. And I still have three years or 40k more miles before the warranty runs out.

    • Wow! You’re brave souls to take on a car that you knew was in an accident! In that circumstance, I’d have to agree: an extended warranty would be indispensable. What do you plan to do after the 3 years/40K miles elapse? Are you going to unload the car at that point, or just hope everything on it is repaired by then?