Extended car warranties - don't be a pushover

Most people don't buy a new car without hearing the dealership finance manager warn about "how foolish it would be" not to protect your investment from unexpected repairs as you put on the miles. What comes next is a persistent sales pitch for a solution to your new fears: an extended warranty. "You could save the amount of the plan cost with just one covered repair!" says a brochure for Ford's Extended Service Plan.

But extended warranties sell costly "peace of mind" for repair nightmares that probably won't occur, according to a survey of more than 8,000 readers in December 2007 by the Consumer Reports National Research Center. We have long advised that extended warranties are a poor deal for almost every product. Now we have the first data showing that this advice applies to most new cars, as well.

To raise public awareness on the issue, Consumer Reports is launching a national advertising campaign this week targeting the car-buying public.

Sixty-five percent of the survey respondents said they spent significantly more for a new-car
warranty than they got back in repair cost savings. On average, dealers collected around $800 on each extended warranty they sold.

Respondents cited warranty costs of $1,000 on average that provided benefits of $700; an average $300 loss. Some 42 percent of extended warranties were not used, and only about a third of all respondents used their plan to cover a serious problem. About one in five respondents (22%) said they had a net savings.  Seventy-five percent did not buy extended warranties at all.

Extended warranties were, however, a better deal for those who bought more troublesome cars
scoring lower in Consumer Reports' reliability Ratings, such as those from Mercedes-Benz. Still, only 38 percent of Mercedes-Benz owners said they saved money. The average loss was $100. Lexus and Toyota owners lost the most money: $600 on average for Lexus and $550 for Toyota. Owners of Pontiacs and Jeeps broke even because on average they had covered repairs that equaled the warranty cost.

Our advice

• Don't feel pressured to buy an extended warranty at the same time as buying a new car. Instead, shop about six months before the vehicle's factory warranty runs out.
• Ask for and have a trusted mechanic review sample contracts before buying.
• Bargain hard, sales commissions can be large.

Read the complete report "Extended warranties: A high-priced gamble" to learn more about:

• How extended warranties work
• What the average by brand is for money lost
• Frequency of warranty use by brand
• Who should buy a warranty
• How to get a fair deal

Comments

[MARK LITTLE]

i noticed in your article on extended warranties that you stated most dealers sell aftermarket warranties that they only make the money on and dont administer.this is inaccurate.most new car dealers would prefer to sell the manufactures extended warranty.the dealer i work for wont accept aftermarket.you need to acknowledge the fact of new car dealers selling the manufactures warranty.and the benifit of those warranties.you recieve better coverage and somr flexibility when you buy from the manufacture.independants and some new car dealers sell aftermarket,however usually the dealer has an agrrement with the aftermarket and they are not hard to administer.how like your publication to kick the car business again when its down.get your facts straight.

[Richard Heise]

what about warrenties that come with new cars and the company wants to sell you an extended warrenty after the initial warrenty from the
new car has expired.Is it worth buying????

[Frederick Small]

It appears consumer reports and others take the position you have to get more back than what you spend. Let me ask them this Would you go without health insurance today? Would you go without fire insurance on your house? I would expect the answer to be no. I don't think my house is going to burn down but I'm not willing to take the risk of rebuilding out of my pocket. The idea you have to get your money back is asinine!! I'd like to know if the authors that state that have homeowners or health insurance.

We know that vehicles will break down, even the most reliable manufacturers have service and parts departments to repair their product. Are you going to tell me a Toyota or Lexus has never had an engine or transmission fail?

Now the fact that some vehicles are more reliable does come into play along with the cost to repair the vehicle, a Toyota contract will cost less than that Jeep.

It's all about risk and your own budget, is it easier to pay a few bucks a week for protection or hundreds if not thousands of dollars "ALL OF A SUDDEN" if something breaks.

[John Vecchioni]

If the consumer is taking a 36 month loan on the purchase of their vehicle then your theory might make sense (depending on their miles driven each year) but, most people are "payment" purchasing and longer terms are required to facillitate their budgets. If budget is important and little money down is available at the time of purchase why would anyone expose themselves to additional financial exposure that they can't afford to pay for? There are three ways people pay for auto repairs. They use a credit card (at a high rate of interest), take it from a family account that was not intended for auto repair (college or vacation fund) or borrow from a family member or bank at a higher rate. Why would anyone do that to themselves?

[Autoinsider]

If you do think you need an extended warranty shop on-line. The same coverage available on-line costs hundreds more at the dealership!
The Auto Insider

[Bernd Vacendak]

As a former F&I manager at both a Toyota and a Honda dealership, I can personally attest to the facts surrounding the scams that occur in the finance office of car dealerships. The pressure placed on F&I personnel to sell warranties, insurance, paint protection, and marked-up interest rates is tremendous. Most of these folks are working 70-80 hour weeks and are paid 100% on commission. If the profit per car is not meeting expectations, they are either out of a job or starving. Most stores set a target of around $1000.00 mark-up on extended warranties. For the average Honda or Toyota, this means that a "bumper-to-bumper" factory plan with a zero deductible and 100,000 miles of coverage has a cost of around $600.00 to $900.00 and is sold for up to $1995.00. Clearly, this is not a good deal. Even if they were sold at cost, the value would be questionable. I personally own a 2005 Toyota Sequoia and have just such a factory plan. Getting it at true cost, I will probably break even at 100,000 miles. If it were marked-up, forget it. If you choose to purchase an extended warranty, insist on a manufacturer-backed plan. The majority of dealerships push non-factory plans because the owners make more money on these due to vested interest via ownership of the claims funds. Good for the dealership owners, bad for the consumer. Many F&I personnel are forbidden to offer factory plans unless the customer insists. Also, negotiate very aggressively with the knowledge that the profit margins are VERY high. If the F&I guy or gal says no, you say no. GAP insurance: unless you trade in a car with significant negative equity, say NO. If you buy it, know that dealer cost is around $200.00 and it will be sold for anywhere from $500-$800. Credit life and disability-forget it. Paint and fabric protection, undercoat, leather and plastic treatment, again-forget it. Dealer cost around $200.00, retail anywher from $595.00 to $995.00. A complete waste of money. Tire damage plans, again, forget it. I saved the worst rip-off for last: window or VIN etching on the glass for theft "protection". If the dealer either tries to sell it or worse, tells you you have to pay for it because it is already on the car, walk out and do not buy from such a completely unethical dealer. Only after losing a number of car deals will dishonest dealers cease trying to foist such rip-offs on unsuspecting or ill-informed consumers. Besides, why would you want to reward such a dealer with your business when they are willing to even attempt such unsulting and unethical ploys. Finally, if you are not getting dealer financing at a non-subvented or subsidized rate i.e. 0% or 2.9% etc, know that the interest rate you receive is marked-up above the "buy rate" by up to 3% depending on what either the sales desk or the F&I person can get away with. For example, if your credit score is above 730-745, you could qualify for 60 months at 5.5%. You will be told that the lowest rate available is 6.95%. Three quarters of the difference in interest over the life of the loan is retained by the dealer as profit and is paid up-front by the lender. The same is true of non-subvented leases. The money factor, which is the lease version of an interest rate, is marked up and retained as extra profit. If you are not leasing at a manufacturer special money factor, insist on being told the money factor. Multiply this number by 2400 to get the corresponding APR. For example, 0.0030 X 2400 = 7.2% APR. Not a good rate if your credit is good. In summary, caveat emptor!

[Frederick Small]

I know this is my second entry but I feel I must respond to the 2 posts right above.

Autoinsider's advice to shop online is dangerous. You need to make sure you are dealing with a reputable company, a good policy, and that the program has the proper insurance behind it. Too many people have been taken advantage of via internet and mail sales. These people give good contracts that pay claims properly a bad name.
Do you know what type of definition of a breakdown to look for? What the cancellation provisions are? Is it pro rata/ or pro rata less claims paid? If you don't know deal with a local dealer that will sell you a quality Service Contract.

Bernd Vacendak says he was a Finance and Insurance Manager for a Toyota/Honda dealer. He says point blank not to buy credit life/disability insurance. How dare he tell you what risk you should or shouldn't take. I would love to have him meet the thousands (yes thousands) of people each year that file claims and are thankful for their coverage. His explanation on GAP is not realistic, while it is a no brainer that you need it if you finance negative equity, anyone financing less than 80% of the purchase needs to examine the term, interest rate, and depreciation estimate for their purchase to make an informed decision.
Chemical sealants help maintain the beauty and appearance of an expensive purchase. Good programs will repair/replace/ or refinish should the product fail. These are not useless products, what is the difference in value at trade time or if you are selling your car on your own between a car with stains on the inside and spots where the paint has been pitted due to bird droppings and the finish has faded. Which car would you buy? Which one is worth more?
Yes a dealer does buy and sell money, so does your bank. Many times local banks will publish a low rate utilizing 20% down. If you have good credit you will qualify, if you are marginal you may not. When a dealer negotiates a loan with a bank in today's world there are different tiers based upon credit score/downpayment etc. The person that doesn't qualify for the low rate can still drive that new car home thanks to the dealer!! His own bank may have said simply "I'm sorry". That being said today's consumer is being offered a service of financing at the dealership, a service they can accept or decline. But think of this; Does it matter how much if anything the dealer is making if you are satisfied? Do you want your dealer to be there for you next year? If he is buying his money for wholesale market rates and marking it up why does it matter? Do you tell the manager at the supermarket he is charging too much for corn? Or care what the corn costs him?

And last but not least the Service Contract; Bernd Vacendak at one time felt there was value in having one, as he purchased one for his vehicle. FORGET ABOUT THE FACT THE DEALER IS MAKING A PROFIT
Make your own decision based on the cost to you and the protection afforded to you and your budget. The dryer I just purchased cost $1099.00 the service contract I purchased was $99.00 for 5 additional years. A good deal huh? It was to me! Let's take it a step further for a new vehicle $1099.00 x 20 = $ 21,980.00 now $99.00x20= $1980.00 Hmmm seems like the numbers equal out.

Read my post above, be aware, but don't let a few bitter people sway you. And yes, I am an Insurance agent that provides products and consulting services to the auto industry.

[turbo nick 03]

I just got off the phone with continental for an extended used car warranty on a vw car w/ 150k exist miles - It's for 5yrs and 100k miles with coverage on lubricated engine and transmission replacements only. They want $1600 w/ zero deductible and some other coverage for towing/breakdown, car rental of $100 and the option to transfer the policy.

It sounds too good to be true. I have spent $5k +/- over the last 8 yrs since it was brand new on car mechanical repairs, tires etc. and the private sell value is approx $5k.

I couldn't get them off the phone and say no but am likely to review and stop the policy within the 30 day review period after I review the small print. In fact I originally emailed for information only.

My gut feeling says if I keep the car for the full 5yrs it might be worth it. On average I spend $500 on scheduled dealer maintainance at least twice a year. If I'm "lucky" 50% of future service would fall under the coverage or be engine or transmission specific repairs. That is $500 x 5 = $2500 over a 5 year period. It's probably going to be more like 25% or lower with an exceptional one off event that is covered that might make it break even.

In summary, spending 32% of the car value on very specific and limiting insurance policy is like selling freezers to eskimos. But in this era of climate change anything is possible!

[bonnie]

I just found out the extended warranty I purchased for $1500 is now in receivership. The first repair I had on my car after four years was the fan and it cost $750.00 labor and parts, with the fan part costing $400.00. I had to pay the whole thing because there is no money and it is now in the court's hand. The insurance company, Capital Assurance, doesn't have the money to cover the Ulitmate Warranty Corp. that I paid for my coverage. The receiver said there is no money to cover my repair. This morning when I got to work our clerk told us she took out an extended 100,000 mile warranty from her Toyota dealer and they went bankrupt. They had to pay the repairs on their own. What is going on and who is regulating this industry?

[nick d]

BUYING AN EXTENDED SERVICE CONTRACT "EXTENDED WARRANY" IS NOT JUST PIECE OF MIND, BUT ALLOWS YOU TROUBLE FREE OWNERSHIP.WHEN YOU'RE ON A MONTHLY BUDGET, THE LAST THING YOU WANT TO DO IS MAKE A CAR PAYMT PLUS A REPAIR.WHAT YOU WANT TO DO IS PUT SOMEONE ELSES MONEY AT RISK AND NOT YOUR OWN, THATS THE NAME OF THE GAME.

[Patti]

Can someone offer advise regarding the purchase of an extended warranty on a Hybrid car? ...And specifically Mechanical Protection Plan?
Thank you.

[ok]

What needs to be looked into is that the companies do NOT disclose all the facts about their extended warranties. Take Toyota for example. They and most others say that if you wish to cancel your warranty past 30 or 60 days they will give you a pro rata refund based on the mileage and time you purchased the warranty. That's great, but WHAT IS THAT PRO RATA percentage or formula? This should be disclosed in the paperwork. Also, there needs to be a class action against Toyota and all the other warranty providers that prevent you from transferring the warranty more than once. If you sell the car to someone and then they want to sell it to someone else the warranty can only be transferred ONE TIME, so it is valueless. This is totally unfair and states should require that these extended warranties bind with the vehicle like the original warranties do.

[antim libretti]

I purchased a dodge pickup in october 2005,it came with 8/80,000 ,eight years eighty thousand miles which ever comes first,I thought I purchased an extended warrenty,thats what I insisted I wanted so when the factory one expired I would still have three more years of coverage,since mostly everything was covered,and since the first owner bought it in march the expiration date was march of 2008,also what I have found out they sold me an upgrade on the one I already had why would I upgrade ?when mostly everything is covered,another thing I was told was my three year purchase was only,two years five months what is wrong here ?If I purchsed a three year warrenty even as an upgrade I want my three years worth,not until march I bought the truck in october why is it ending in march if I upgraded for three years and I called the main branch and was told what ever is in their computers is what the dealer sent them I want my three years or give me a refund,does anyone have any advice please help me?

[Mark Paulsen]

TO those pushing the product... if people can afford the minimal additional monthly cost of the insurance plan they can afford to put that money into a money market (making at least 3 to 5 %) By the time the factory warranty expires they should have enough to cover any repair... If they don't have a problem with their car then the money is there for them to use towards the purchase of a new car or retirement -

As for the notion that buying an extended warranty for a car is akin to health or home owners insurance - that is, pardon my french, stupid.

First of all I don't know to many people that need to fear the $50,000 auto repair that would special financial ruin. It is almost impossible for a single individual to "self-insure" their health coverage. But, if you can afford the monthly payment for an insurance plan you can afford to self-insure your auto repairs with the most likely outcome being a nice chunk of money for a down payment of a future purchase.

Secondly you can buy catastrophy insurance for your health coverage (i.e. $5,000 dollar decutable for very reasonable rates). Do any of the extended warranties offer a comparable program?

As for the drier comparison, you can't have a service person out to look at your drier for less than $100 dollars. One call and you've made your money back... There are many repairs on a car that are less than $1900, you would need multiple things to go wrong or one catastrophic repair such as a transmission rebuild to justify that $1900.

Sorry if this is long winded but I just bought a Honda Odyssy today and I'm a bit sore at the treatment we were given regarding these "value added" packages.

[Tom]

In response to Mark Paulsen, you're right it cost about about $100 to get the appliance repair man to my house. He actually credited the "house call fee" to my REPAIR BILL of $760. I wish I had had the $19 a year warranty.

Regarding the idea of people actually placing the $30 to $40 per month cost of an extended warranty into a money market, you must be living on the moon. You don't seem to understand that most people today, that are out there buying cars, are living from paycheck to paycheck and aren't sofisticated enough to handle their finances in the manner you speak of. That is why they need 60, 72 and even 84 month financing. If they had the financial education that few have they would never need GAP, extended warranties or for that matter financing. But that is just not the case. These policies are out there for these people that can't afford to pay cash for a car or cover their GAPs out of pocket or can't afford to pay a $2000, $3000 or $4000 repair. This is the same reason they have collision insurance. The people that could afford to self insure certainly don't need your financial advise either. They are already financially secure. Most people however are not!!!

The question to buy an extended service contract or other coverages is not cut and dry. Each individual purchase is different. Take into consideration what you future financial situation may be. Consider possible job changes or layoffs, how much equity you have, how much savings you have, future expenses you may inccur, the type of car your buying, the length of the loan, other insurance ocverage you may have, your history of car care, the miles per year you drive, if you use a garage, etc.

If you opt to purchase any coverages be sure they are insured by an A Rated carrier or better. Ask questions, get testimonials and READ THE POLICY BEFORE YOU SIGN. Lastly........NEVER BUY ANY TYPE OF SERVICE CONTRACT OVER THE INTERNET. Recently some service contract companies have filed for bankruptcy. All of these companies were poorly insured and most of them marketed their product over the internet. These buyers now have a useless piece of paper and that is all. Additionally, internet conpanies can't quarantee that a repair shop in your area will axcept it for claims and you should not be put in a situation where the repair shop won't except payment from the company. That leaves you chasing the company for reimbursement. For this reason alone, is why you should by from a dealer that services their own work.

[auna kirkpatrick]

What about buying an extened warranty on the one that is running out? I have a 2002 Jeep with 41,000 miles.

[john]

I have read all the commentaries, but feel I need to go back to the old belief that, generally speaking, extended warranties on any product is a big money maker for the retailer. One would be better off putting that money away in a personal account to cover any unexpected repairs. Unfortunately, most of us do not do this,expecting the product to not fail for several years.
On the other hand, there is value in "peace of mind" while driving the vehicle. This is the decision the owner needs to make.I am just very leary of the different types of aftermarket warranties out there. Some will claim that the breakdown falls under "wear and tear" items, and they reject the claim.

[Barb]

We just purchased a new Toyota RAV4. Even though my gut told me that the extended warrenty was a scam we went along with it. We were told that we would recieved the $2000 back if we did not use the warrenty for repairs. "If the electrical or computer system has any problems it usualy costs more than $2000".

The sales man was so pushy that I resisted just for that reason. My common sense was telling me that, "If it seems too good to be true it probably is". It was like a time share sales talk. "This offer is only good right now, you can not come back in the morning and sign up for it".

I thouroghly researched the car that I wanted to buy but I was taken by surprise by the sales pitch for the extended warrenty.

What this tranascation has done for me is make me resent and mistrust Toyota and our local Toyota dealer. Too bad I have always loved Toyota cars.

[DaveInFlorida]

I live in Florida, home of the luv bug. For those of you not familiar with them little buggers, they are a fricken nightmare to car paint. Twice a year, for several weeks they come out in sworms. They are attracted to the exhaust from cars so they tend to hang out around roads. They are very soft and basically explode on impact with your car. Their insides are like acid and will pit your paint if not washed off within 24 hours. So unless you like to wash your car every night when you get home, you're paint will be ruined. I've had 5 different cars since I moved to Florida and each one has been damaged by luv bugs. I was planning on having the 3m film protection added to my new vehicle but the dealer is offering a product called Auto Armor. The 3m film protects the front bumper, the side view mirrors and the bottom third of the hood (apparently they think the bugs don't hit the top of the hood). For a hundred bucks more they will cover the entire hood. The 3M film will pit from the luv bugs if you don't wash them off within 30 days. I called around and this product costs about $550 to install on my new SUV. The Auto Armor from the dealer is $625 but it comes with a 7 year (unlimited miles) warranty. If there is any damage from luvbugs, road tar, tree sap, fading, etc they will paint the car (or at least the area effected). That warranty also covers the interior for fading, stains etc. I know that it probably only costs them $75 to put the coverage on the car, but what I'm paying for is the fact that they will fix any damage for 7 years. Heck, I don't care if they don't put anything on the car; if they will fix the luvbug damage (and there WILL be damage) then it's well worth the $625. I used to live up north and never had a problem with bugs damaging the paint or the sun fading the paint but here in Florida it's another story. Every car I've owned has been damaged and had fading of the interior due to the amount and intensity of the sun. Some may think it's a waste of money, but to me it's a no brainer. I hope it does actually work and I never have to bring it in for a warranty claim (which is handled by the dealer, not some third party).

[Susan Carey]

I cannot disagree more with you. On a new car maybe but for someone buying a used vehicle you have NO idea how the vehicle was treated. A piece of machinery that is known to break for many different reasons. We live up north in the extreme cold and -50 below does some crazy stuff to your vehicle. Why would you take that chance. Stupid little repairs cost a fortune, labor rates are insane! I would never buy and finance a used vehicle without both ESC and Gap protection. I am also a car salesman!

[Hugues Lefebvre]

Has any one heard about Warranty Activation Headquarters, Service Protection Program, or Dealer Preferred Warranties? The manufacturer's warranty has expired on my Dodge Magnum (4.5 years old, 113,000 miles) and they have been contacting me several times by mails offering extended warranties. However I have read some negative comments about these companies on the internet (rippoff website, Better Business Bureau) and suspect these warranties are some sort of a scam. Any idea?

[DonR.]

I'm researching extended warranties on a 2006 Chrysler T&C minivan. Can anyone recommend a company they've had good service with?

[Steve]

I unfortunately had to step in to a car deal a week ago because a relative is undergoing personal bankruptcy, and needed my "good credit" to buy a vehicle...so I get to "own" another car.

Bernd's comments above are excellent, and jibe with my own understanding of the industry, in terms of margins on the various products.

I also read the comments from the people who are selling insurance (and hey, I sell for a living, so I understand the angst) or those who argue "the consumer can't afford [the gap, repairs] so they have to insure".

When I went over the finances for the transaction with my relative, we compared the cost of the various insurance items.

The "gap insurance" for $600 was going to be financed on a 12.99% loan (because of bad credit). The six year cost of this insurance was $867.

The extended warranty for $1500 was going to be financed the same way and cost $2,167.

The way the salesperson explained this to her was similar to the rationale above: that because she couldn't "afford the risk" she had to buy the insurance.

Let's try this the other way around: how will she ever be in a position to afford this and other things she wants and needs? (like for example, college education for her kids).

By applying personal financial discipline, she can *save* the money and pay for a repair if necessary. If it's not necessary, she has savings she can use for other, important things. Yes, there's a bit of risk, but it's the only way she can get ahead.

This requires that she actually saves $42/month. Now, she will. It adds up!

[Susan DeLuca]

Which extended warranty should I buy for a 7/70,000 warranty that's going to expire in September? I've read all the posts and all I can say is thank heavens we've had a bumper-to-bumper extended warranty on our Chrysler Sebring. For this no-deductible plan, it cost us about $2500. What has it given back? Well over $7,000 in major repairs for which we've paid $0 and this 2002 car only has 49,000 miles on it! The car has to last for two more years and we want to renew the warranty, but don't know what to do to make sure we get the best value. The original one was straight from Chrysler. The $2,500 it will probably cost us for a two-year warranty will be much less expensive than repairing a 7-9 year old car and we can't afford a new or used car right now (my daughter needs it to finish up the last two years of college). Any suggestions anyone can give would be appreciated. We've already talked to Chrysler and they said to talk to any dealer in the area, but the posts above have me concerned. Thanks for your help.

[Jim S]

I'm with Bernd and Steve on the advisability of purchasing these extras from dealers, particularly at the huge mark ups they charge and the often misleading rationales they use to sell them. I don't begrudge salesmen (having been one for much of my life) nor making a profit, but even if you need one, shop around first.

For example, someone asked about hybrid warranties. My son found a dealer in the midwest who routinely sells factory (Toyota) extended warranties basically at cost (@$600). His source was a Prius owner's forum he found through Google.