Extended warranties can be really confusing. On one hand, you might think that you need it because what will happen if your car breaks down? But on the other hand, you probably don’t want to pay for it if you aren’t going to use it. It’s a conundrum of adulting. Yay. Let me show you how I sift through the extended warranty debate in my own mind. And hopefully that will help you make the correct decision for your situation.
What is an Extended Warranty?
First let me say that for the rest of this article, I will be addressing the extended warranties that you can purchase at the dealership when you buy a car, NOT the extended warranty calls that we all get 10-20 times per day. NEVER buy an extended warranty from one of those numbers. If you are going to buy one, do it from the dealership when you buy a car.
Simply put, an extended warranty is a warranty that has been extended past the original one. So it’s a warranty that will last longer. The amount of time that it will last depends on what the contract stipulates. When you buy a car from a dealership, you will probably be given a few different options. One that is 2 years or 24,000 miles, one that is 3 years or 36,000 miles, one that is 4 years or 48,000 miles, etc.
There are two main types of extended warranties:
- Exclusionary warranties
- Stated coverage
Exclusionary warranties are typically sold on new vehicles or vehicles that are still covered under some sort of factory warranty. This type of warranty will state what the warranty does NOT cover. (Hence, the name.)
Stated coverage warranties are sold on pretty much all other vehicles. This type of warranty will state exactly what it will cover and nothing else.
How Extended Warranties Work
When you purchase an extended warranty, you are basically pre-paying some of your repair costs over the next several years. Sometimes that can be good. Sometimes that can be bad. (I’ll get into this more in a minute.)
When you buy an extended warranty, you can either pay for the entire amount up front or you can usually roll it into your loan.
So for example, say you have an extended warranty that costs $2,500. You can either pay that money up front to purchase it or you can pay an extra $40/month or so for the life of your loan.
If you are thinking of purchasing an extended warranty, make sure you understand what the warranty will cover and not cover. It is really important.
Reasons You Might Want an Extended Warranty
There are two main reasons that someone would want an extended warranty.
- The possibility of saving money on big repairs down the road.
- The peace of mind that you will be less likely to be hit with huge repair bills should your car break down.
Yes, you can save money down the road on big repairs. Getting an extended warranty is basically like prepaying for the repair cost of it. So for example, if you buy a 5-year extended warranty that costs $2,000. You are basically prepaying $400 per year of repair costs. If you think that your vehicle will be unreliable in the next 5 years. You probably want to consider buying that extended warranty. But if you can say (with a reasonable degree of likelihood) that your vehicle will be reliable and not break down, then you probably want to avoid the extended warranty.
It’s hard to quantify the value that a peace of mind brings to a person. However, since personal finance is personal, you have to take that into account. Like most other personal finance decisions, there is a great deal of personality that goes into it.
Reasons to Steer Clear of Extended Warranties
There are five main reasons that you may want to avoid buying an extended warranty:
- Possible overlap of the dealer warranty protection of a new car.
- There may be exclusions that the warranty will not cover that are more likely to break down on your specific vehicle.
- There may be a high deductible with the extended warranty.
- You may not get to pick your own mechanic.
- If you don’t use the extended warranty, it is simply a sunk cost. (Money that you have spent that you cannot get back.)
The biggest reason that people do not purchase extended warranties is because they do not want to buy it and not use it. However, this is true with pretty much all insurances. We all hope to never use our homeowners insurance, but we have it. The same would be true with life insurance, renters insurance, car insurance, etc. If you want a piece of mind that your vehicle will be covered, you have to pay for it.
Should You Buy an Extended Warranty on your Next Vehicle?
The short answer is, “it depends”. It depends on your situation, your financial position, how much and how hard you drive the vehicle, etc.
Many people cannot cover a $400 emergency. If you can’t cover an emergency that small, then you need a way to do it. My first choice for you would be to save that money in a savings account. But having an extended warranty can do it as well.
The danger with using an extended warranty is paying a lot more for the warranty than by just saving the money in cash.
In my opinion, you need to have an emergency fund. And if your car breaks down, that is what the emergency fund is for.
On the other hand…
This is a personal finance blog. So I approach most of the topics here through the lens of money first. So on one hand, most extended warranties go unused. Meaning that most people simply “waste” that money. However, it is hard to quantify how much peace of mind is worth. So if paying the certain amount that you need for an extended warranty on a vehicle gives you a lot of peace of mind. Then go for it.
Final Thoughts
Here is the bottom line with my opinion of extended warranties.
In most cases, they are not worth it if you:
- have an emergency fund
- drive your car responsibly
- do your reasonable due diligence to purchase a vehicle that will be reliable and last for a long time
- and do your routine maintenance (oil changes, tire rotations, filter changes, etc.)
If you do these things, then you will be far less likely to need an extended warranty.
And for full disclosure, I have never purchased an extended warranty on a vehicle.
You’re not necessarily wrong if you do so. But make sure that you need it and/or it will give you enough peace of mind so that you can sleep better at night.
Remember, personal finance is PERSONAL. 🙂
I really hope this helps you!
I am here for you!
Until next time!
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