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Posted: 6:00 a.m. Friday, April 25, 2014

Are Extended Car Warranties Worth It?

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By Clark Howard

ClarkHoward.com


Auto repair service plans can be enticing in an era when people are keeping their cars longer. But I say they're a waste of your money.

Why extended auto warranties should make you think twice...

I saw a recent article in Real Simple magazine about these third-party extended warranties that are often pushed by robocall and by letter.

The typical selling price on an auto repair service plan is up to $3,000. For that money, you supposedly have the peace of mind to use the service plan for repairs when your car breaks down.

But guess what? The contract for that supposedly "bumper to bumper" coverage has so many loopholes that it's almost impossible to get any repairs covered!

"The sellers often cite loopholes in the contract (ones you would never be able to discern) to avoid paying up, then void the document, leaving you in the lurch," the magazine reports.

If you are worried about extreme out-of-pocket expenses from repair bills for old cars, I recommend you buy the manufacturer's own extended warranty. Do not buy one from the dealer, though, because those are often third party too. Be sure it is the manufacturer's own.

However, if you buy a reliable brand and follow the maintenance schedule, you're likely to extend the life of a car anyway and not have to incur big repair bills. I recommend that you stick to used cars on Consumer Reports' recommended list.

Will you ever use that warranty?

Speaking of Consumer Reports, the magazine dug deep into the experience of extended auto warranty owners to reveal some surprising stats:

  • 55% of people who bought an extended warranty never used it.
  • Of the 45% who did use it, on average, they spent more on the warranty than it paid for repairs.

Wow. Talk about a losing bet!

Here's the thing though. If you don't buy a warranty, what do you do if you really couldn't come up with the money to pay for a repair?

Let me suggest this compromise: Instead of rolling the extended warranty into the financing of a car, be disciplined and put that same amount of money every month into a savings account. You would be better off that way, but again, it depends on your discipline to save the money *before* you need it.

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