First, extended warranties are all over the board. A dealership typically offers two types. One is the type the manufacturer offers, so if I bought a Subaru, it would be a Subaru extended warranty. If I bought a GM, it would be a GM extended warranty. The dealership also offers an “after-market extended warranty.” That is usually serviced by a company whose sole product is extended warranties.
For whatever reason, most after-market extended warranty companies are located or originated in the St. Louis area. The St. Louis Better Business Bureau and the St. Louis Attorney General spend significant time dealing with these companies because of consumer complaints.
ConsumerAffairs.com says, “From what we’ve heard, we suspect that most extended warranties are a waste of money that could be better spent on performing exquisite maintenance, still the best insurance of trouble-free motoring.” They also said, “Sixty-five percent (or more than 8,000) Consumer Reports readers surveyed by the Consumer Reports National Research Center in the winter of 2011 said they spent significantly more for a new car warranty than they got back in repair cost savings.” That is very common. (http://www.consumeraffairs.com/news04/2005/extended_warranty.html)
There are even conventions for these companies that teach how to sell an extended warranty. The following quotation is from the website, WarrantyInnovations.com. It explains the whole purpose of the convention, throughout all their breakout sessions and their main course.
“The discussion will also include ways to leverage systems and data to drive extended warranty sales, how to build a recurring revenue stream with extended warranties in maintenance, lower costs, and claims against your program and how to better work with your insurance and our administrator.”
That information clearly states that their intent is to sell more warranties and reduce the number of claims. Extended warranties are a contract, and I learned a long time ago that contracts are usually written in favor of those who write them.
Without question, extended warranty contracts are not good for the consumer. Can you find people who have been able to save money in buying an extended warranty? Yes, you can. The response rate, according to Consumer Reports, is about one in five—so about 20% said they had a net savings.
The Consumer Reports study basically says that when you’re buying a car, it is better not to buy an extended warranty, but instead use those dollars to maintain your vehicle. In the survey, respondents cited warranty costs of $1,000 on average that provided benefits of $700—a $300 loss. Forty-two percent of extended warranties were never used, and only about a third of all respondents used their plan to cover a serious problem.
There are also exclusions from coverage by an extended warranty. So, even though you purchased the warranty, you’re still going to have to pay for repairs that are not covered. Beware, because there is a lot of fine print in those contracts. Read it carefully if you’re considering purchasing a warranty.
Most extended warranties give the warranty company the option of putting used parts on your car. So if your transmission goes out, instead of getting a new transmission, you could get a used one—one out of a salvage yard or from a recycler. It’s their choice, not yours. That’s scary, but it saves them money.
All in all, it’s really pretty simple. The warranty companies have to make a profit to stay in business, they have considerable overhead such as personnel, buildings, office infrastructure, advertising, etc. This requires that overall they take in far more money than they spend on repairs. As a total group, the consumer loses. They have to, or the company would fail.
With that in mind, obviously we do not recommend aftermarket warranties.