Is it worth buying an extended car warranty?

After dedicating an afternoon (or more) to test driving, negotiating, and completing a pile of paperwork for your shiny new car, the bubble-bursting finance manager gives a compelling pitch for an extended warranty. It is for your peace of mind, right? Well, not really.

The last-ditch effort to sell you a warranty, or various other unnecessary services, is the dealership's final assault on your checkbook before you tuck it securely away and drive off. Sure, the pitch is convincing: Should an expensive repair be necessary after the factory warranty ends, you'd be protected. No one wants a big, financial surprise, nor wishes to be stranded roadside. (Read: "Watch for these dealer sales pitches.")

But breathe deep and think this through. The sale of the warranty is a profit item, with the dealership serving as the middle man. The premise is that the customer will not need repairs in excess of the warranty cost, minus profit to the dealership and the warranty plan provider. Since extended service contract pricing is not regulated, dealers charge whatever the market will bear, and a 50-percent cut for sales commissions is not unusual. By contrast, our past research has shown that only 17 percent of your annual premium for auto insurance goes to commissions and other selling expenses. In other words, an extended warranty is usually not in the customer's interest.

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If that isn't enough to dissuade you, hear me out. A few years ago, Consumer Reports proved the dubiousness of this pitch by surveying 8,000 owners of five- and six-year-old vehicles that had been covered by extended service plans. Sixty-five percent of those surveyed said they spent significantly more for the contract than they got back in repair-cost savings. Respondents said their extended warranty cost them $1,000 on average while providing an average benefit of $700. That means the average loss was $300. A big reason: 42 percent of extended warranties in our survey were never used, in most cases because the vehicle didn't need repairs or the standard manufacturer's warranty sufficed.

Another reason people were dissatisfied was because the repair was not covered. Clichés about reading the fine print are especially appropriate when talking about extended warranties. The brochure may present the service plan as "comprehensive," but the contract will likely have numerous limitations, such as requiring documented service at in-network shops and covering only certain parts, rather than whole systems.

Rather than invest in an extended warranty, we recommend buying the most reliable car that suits your needs, budget, and taste and taking good care of it. Sometimes, this can mean spending more upfront, but the reward is typically lower ownership costs and even better resale value. But, if you're heart is set on a model known to be unreliable, an extended warranty can provide some protection. Just approach with caution, negotiate the price, and be aware that if you roll the cost into your financing, you'll be paying interest on it for years to come.

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—Jeff Bartlett

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