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Andrew Traub
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Extended Warranties – a High-priced Gamble

In the market for a new auto?

Here’s a good car buying tip.

Extended warranties sell costly peace of ming for repair nightmares that probably won’t occur, according to a survey of more than 8,000 readers conducted by the Consumer Reports National Research Center. Consumer reports has long advised that extended warranties are a poor deal for almost every product. Here is some of the data published in their April 2008 issue:

  • 65% of those surveyed said they spent significantly more for the contract than they got back in repair-cost savings. The average cost of the warranty was $1,000 with an average benefit of $700 meaning that the average loss was $300.
  • 20% said they had a net savings and those were usually for people who bought troublesome cars which scored low on the Consumer Reports reliability ratings.
  • Only 38% of buyers said there were highly satisfied with their warranty purchase putting extended warranties near the bottom of dozens of services rated by Consumer Reports.
  • 12% of buyers reported trouble getting repairs when they used their extended warranty because of contract terms or disputes with the claim administrator.
  • 37% didn’t use their extended service contract to cover repair costs because the problem was covered by the factory warranty.

Extended warranties are not insurance in most states and are not warranties as defined under Federal law. They are more akin to prepaid repair contracts or extended service contracts.

Since extended warranty pricing is not regulated like insurance, dealers charge what the market will bear and a very small portion of the price you will pay actually goes to repairs after intermediaries (like the dealership) get their cut.

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