A family member asked me to help him buy an extended warranty for his car. I got the enviable job because the extended warranty costs a lot of money (over $1,000) and I have the reputation in the family for getting good value for money.
Is an extended warranty on a car “worth it”? The standard advice you hear about extended warranties is that they are not worth it. I disagree. I must say it depends. It depends on what price you pay and what you get for that price. The coverage is worth something. If you pay a low enough price for the right coverage, you can make the extended warranty “worth it.”
Let me begin with what NOT to do when you buy an extended warranty.
1. Don’t buy it from the dealership at the same time when you are buying a new car. New cars are covered by bumper-to-bumper manufacturer’s warranty, typically for at least 3 years or 36,000 miles. The extended warranty kicks in only after the manufacturer’s warranty runs out.
You have plenty of time to see how the car holds up while it’s covered by the manufacturer’s warranty. If it looks like it’s rock solid, you don’t have to buy an extended warranty. If after 2-1/2 years you think you are not going to keep the car for long, you don’t have to buy an extended warranty. The extra time for making decisions and the opportunity for observation have value. Don’t give up that value.
Also, when you are buying a new car, you get only one offer for the extended warranty. There’s little chance to shop. You don’t know if the dealership is offering the extended warranty at a fair price or not. If you buy the extended warranty together with your new car, chances are you will overpay by a lot.
2. Don’t buy an extended warranty plan unless it’s backed by the manufacturer and honored by all dealerships. There are extended warranty plans offered by third parties. I think the chances of getting a repair covered by the manufacturer is a lot higher than getting it covered by a 3rd party because the manufacturer is usually interested in building some loyalty from the owners. I have no scientific proof for this. It’s just my opinion.
Most (all?) car manufacturers have their own extended warranty plans. They call them by different names, for example:
- GM Protection Plan (GMPP)
- Ford Extended Service Plan (Ford ESP)
- Toyota Vehicle Service Agreement (Toyota VSA)
- Honda Care
- Volkswagen RealDriver
You just have to remember to shop for the extended warranty when your manufacturer’s warranty is about to run out.
Now, how do you shop for an extended warranty if you decide to buy one?
3. Shop from any dealership, including out-of-state dealerships. All dealerships of the same manufacturer are authorized to sell the same extended warranty to all customers. The dealership is not on the hook for the warranty. The manufacturer is. You don’t have to buy it from the same dealership where you bought your car. Your don’t have to buy it from a dealership in your local area either.
Extended warranties have a high markup in the MSRP. Never pay MSRP. The markup on the extended warranty is pure profit because the dealership does not have to do anything to it until there’s a sale. They just fill out some forms and collect the sales markup. If an out-of-state dealership has a willing customer calling them, ready to buy, they will much more likely offer a good price, because they know the customer is shopping for price and only a good price will get the sale. A quick sale for $100-200 profit is so easy.
4. Shop by phone, not online. Yes, the old fashioned telephone. You are unlikely to find really good deals online, because the manufacturer discourages posting discounted prices online. One “rouge” dealership ruins the fat profit for everybody. If you call and make an offer that still gives the dealership a reasonable profit, they will gladly accept the easy profit.
For the kind of extended warranty I was asked to shop for, I came to the conclusion that the cost to the dealership is 50% of MSRP. I got quotes for the same plan from three dealerships. Based on the 50% of MSRP number, here are their markups:
|Quote – 50% of MSRP|
|Dealership #1, local||$700|
|Dealership #2, online||$500|
|Dealership #3, out of state, by phone||$200|
You see the difference?
I sent my family member to dealership #3. Everybody is happy. He’s happy to have peace of mind and he saved at least $300. The dealership got an easy $200 profit. All I’ve got is this blog post. 🙂
See All Your Accounts In One Place
Track your net worth, asset allocation, and portfolio performance with free financial tools from Personal Capital.