Extended Warranties: Huge Waste Of Money, Or Lifesaver?
It seems like everywhere you go, whatever you buy, we are always being asked (or worse, pressured) to buy extended warranty coverage when we purchase big ticket items. Sometimes, as in the case of my recent purchase of a USB memory stick, we are even offered an extended warranty on small purchases. Sales people tell us about how buying the extended warranty will give us peace of mind by protecting our investment by offering repair or replacement of our newly bought item for the next (fill in the blank) years. But who is really benefiting from this warranty- the buyer or the seller?
Do you really benefit as a consumer by purchasing an extended warranty? The answer is... it depends. Obviously, from a business standpoint, the store or dealership is making money on the sale of the warranty- or else they would not offer it. But is it worth it from the consumer's standpoint? It all comes down to a few key factors:
1) The term (length) of the coverage. Not just how many years, but in the case of vehicles, how many kilometers the coverage lasts. Generally, the extended warranty only comes into play when the factory warranty has expired so it is important to keep a record of how long the original warranty lasts.
2) Is there a deductible, and if so, how much. It's pretty normal for an extended warranty to have a deductible charge. This deductible is similar to the one you would pay with home or car insurance. In other words, when you bring your car in for a repair which is covered by the warranty, you might have to pay some money out of pocket before the coverage kicks in. This means you pay the first $100, or $250 and the warranty covers the rest.
3) Is there a cap? There is often a maximum dollar amount that the plan will cover. It is pretty common to find in the fine print that the warranty company will only provide coverage until it costs them what you paid for the coverage in the first place. So if you pay $2000 for the warranty plan then you can only receive $2000 worth of repairs before you hit the cap and coverage ends.
4) Exactly what is and isn't covered. This is often what separates a great warranty from a waste of money. What good is it to pay good money for "peace of mind" when many of the issues your vehicle is most likely to have aren't even covered? You should never take for granted that EVERYTHING is covered- even when a sales person suggests it is. For example, even a good warranty seldom covers regular wear items like wiper blades, brake pads or tires. But if you compare coverage from one plan to the next you will see HUGE differences in what each one will cover. We have seen many people spend $1000 or more and when their vehicle breaks down, they find that seemingly whatever goes wrong, few if any of those things are covered. It's often a case of you get what you pay for.
5) Cost. This probably seems like the most obvious one. But it might not be as simple as you think. Depending on your situation, you might want to look at the costs in terms of how much it will ad to the bi-weekly or monthly payment, rather than the total cost. If buying the warranty doesn't add much the car payment, it might be affordable even if the total cost seems high.
6) Your own situation. If you are considering buying an extended warranty, you should ask yourself some serious questions first. Questions like:
"Could I afford to pay for a major repair out of my pocket, on top of my monthly car payment?" You're probably buying this vehicle because you want a reliable vehicle, but what if it needs a repair worth thousands of dollars before you're finished paying for it? Do you have savings you could tap into to pay for the repairs? Or:
"With the kilometers I drive in a year, will my coverage expire before the car (and/or the warranty plan) is paid for?" Seeing some of our customers' experiences, it's not much fun to have a car payment on a broken vehicle that you can't drive, or to still be paying for a warranty that is already expired.
To sum up, it can be complicated. But if you have the information you need to figure it out for yourself, you can make the decision that's right for you. I hope this helps.