Jerry Wayne Odom Jr.

Buying An Extended Warranty On New Car

And why it was a bad decision that paid off.

Most people don't know much about buying a new car. I can say this with confidence because when I was in the market for a brand new 2004 Ford F-150 I couldn't find a soul in 20 who could give me advice other than "don't pay sticker" and "don't be afraid to walk off" or better yet "they'll try to screw you.". While all this information is true I'd wager most people forget all about the point in which the chess match really gets interesting with the car dealership. That time is invoice time.

What's on a car invoice?

Dealer prep, cleaning, interior treatment, inspections and the biggest gotcha of them all the extended warranty. What they're hoping is that after your defenses are down from the fight over the price you'll be less inclined to argue over the invoice. I know you feel like you agreed on a price but that was just on the vehicle not the entire purchase. Well on my first vehicle I got they managed to put the total kibosh on me by scaring an uninformed and unprepared person in to purchasing a $1700 extended warranty on my $22,000 vehicle because I thought I had to make a decision right then. I met my soon to be wife a year later who was an experienced salesman and told me I basically took it up the tailpipe because you can purchase an extended warranty anytime. Additionally I was told that the average disaster warranty repair is around $2k so I basically just paid for something that might happen.

How did it pay off?

I got unlucky and purchased a truck that was going to have problems after the 30,000 factory warranty had run out. Come 38,000 miles the camshafts and cam phasers all have to be replaced when I heard tapping in the engine. That job was around $2100 to the insurance company which more than covered the warrany and it's interest costs.(most don't think about how you're paying interest on the extended warranty) The real pay off came when at 48,000 miles the transmission goes bad and the warranty covers another $2400. I had two other smaller issues with a thermostat and a window come up both after 30,000 in which my truck's extended warranty saved me an additional $300. So for around $2000 on the warranty they covered $4800 which saved me $2800.
So wait why is it a bad deal?

Buying an extended warrany like this on a new vehicle is like casino gambling but reverse on the money. In a casino you play a game 75% in favor of the house where you should only play when you can afford to lose. In buying an extended warranty you play a game where the house also wins almost all the time and you should only play when you can't afford the cost of losing. However most forget they've got the factory warranty for 3 years and the extended warranty isn't going to do anything but cost you money until then. After that you might get lucky and have a bad car to cover it but chances are you won't. Additionally the following points?

Look above. A catastrophic problem cost $2200. Why pay for a catastrophic problem up front with the warranty? Makes no sense. Better yet you need multiple problems to come out ahead. Do not miss a service point when you buy the extended warranty. Countless people lose because the first thing the insurance company does is send an adjuster down to scrutinize every aspect of your vehicle to see how they can prove failure to maintenance the vehicle was the cause in which case your extended warranty is worthless. If you can't save $50 a month over the course of your 3-5 year regular manufacturers warranty you shouldn't be buying a new car. That's about how much it would take to cover. You can purchase the warranty at any time before the manufacturers runs out. Don't be fooled.

Extended warranties are bluntly a scam. One I'm not so proud to say I came out on top of. Don't buy it. Save your money and open a rainy day savings account.

Jerry W Odom Jr. - July 21, 2009