Should you buy an extended warranty on a new car?

Should you buy an extended warranty on a new car?
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All new vehicles come with a basic “bumper-to-bumper” warranty that covers mechanical and electrical parts that fail. It doesn’t cover parts that wear out, like tires, brakes and batteries — and “Bumper to Bumper” is a misnomer. If your bumper is trashed in an accident, it’s not covered by the initial warranty.

The most common coverage for non-luxury nameplate is three years or 36,000 miles, whichever comes first. For luxury nameplates, it’s typically four or five years and 50,000 or 60,000 miles.

Are extended warranties the right move or a rip-off?

Extended warranties add years and miles to that initial coverage. But should you buy one? I am not an impartial voice on the subject. I have never purchased an extended warranty. I see them as an expensive gamble.

Consumer Reports agrees. A few years ago that organization conducted a survey that showed that 55% of extended warranty purchasers hadn’t used it during the lifetime of the policy. And, on average, the ones who did spent hundreds more for the coverage than they saved in repair costs.

Here are two additional reasons to skip those policies:

All automakers are making much more reliable vehicles than they did 15 or 20 years ago

J.D. Power’s 2017 Vehicle Dependability study measured car reliability by analyzing the problems experienced in the last 12 months by over 35,186 original owners of 3-year-old 2014 models.

A brand’s dependability rating is based on the number of problems reported per 100 vehicles sold. Those brands are ranked from best to worst, but the scale on those rankings is minuscule. If yours were a 2014 model of the highest-ranking brand, you’d have had one chance in 100 of having a problem in your third year of ownership. And if yours was the lowest ranking brand (excluding Fiat), you’d have had two chances in 100 of having a problem. (There are likely to be greater differences vehicle-by-vehicle, but I can’t afford the six-figure price for that data.)

Extended warranties are a sky-high profit item for new-car dealers. They’re usually sold by the Finance and Insurance Manager, the person with whom you’ll sign the purchase and loan or lease documents. Lots of folks don’t qualify for the cut-rate financing most new-car brands offer (and which usually aren’t available on used cars). Dealerships get a nice piece of the action on the higher-interest loans they arrange with automakers’ captive finance subsidiaries and local banks. The Finance Manager is also the person who gives you the two-lapel sales pitch for extended warranties, on which dealerships make beaucoup bucks. The following profit numbers may astound you.

AutoNation is the country’s largest and best-managed automotive retailer. It’s a publicly-owned company, so we can buy its stock. At the beginning of 2017, the company owned and operated 371 new-vehicle franchises from 260 stores, selling all vehicle brands. This eye-opening data is from the 2016 Annual Report:

  • The Finance & Insurance function accounted for just 4.1% of its revenue, but a whopping 27% of its gross profit. Extended warranty sales were an important contributor to that result.
  • By contrast, AutoNation’s new-car sales were 56.7% of its revenue, but only 19.2% of its gross profit.

The company earned 40% more gross profit dollars from that 4% of its revenue than it did from the 57% from new-car sales!

This may surprise you, but dealers make very little profit selling new cars. In 2016, AutoNation’s average “revenue per new vehicle retailed” was $36,373 — including both the vehicle selling price and the secret factory bonuses its dealerships got for reaching overall sales and other targets. The gross profit on that revenue? Just $1,902 — a measly 5.2%!

Simply put, dealers are in business to sell new and used cars so they can make the two-thirds of the gross profit they need to cover their 12% to 15% overhead expense and realize a net profit providing a reasonable return on their multi-million dollar investment. If they just sold cars, they’d be out of business in days.

A factory-backed warranty is the only one I’d recommend, but…

My advice is: Put the $1,000 to $2,000+ you might pay for a factory warranty in a “rainy day” account — and pray for sunshine.

Still, I realize some of you will want or need the additional peace-of-mind that comes with that warranty. I get it. Here’s what you should do.

Go to the automaker’s website to review the alternative plans offered. Most brands describe these somewhere on their site. (Use the search function at the top or bottom of their home page.) The policies will differ by the number of miles and years they cover. Some will have deductibles, others won’t. Choose the one whose rings chime most loudly with you.

You can purchase that policy anytime before you reach the time or mileage limit on the original “bumper-to-bumper” coverage. There are no published retail or dealer invoice prices. Transaction prices for the same warranty can differ widely from dealer to dealer, just as they do for new cars.

So how do you get the best price? The same way you do for the new vehicle: by making dealers compete, ideally when you buy that new car.

Make it part of your initial bidding process, getting several dealers to compete for the best total price for both the car and the warranty. You’ve got significant leverage then that you won’t have later, and you’ll be able to roll that cost into the auto loan instead of paying it all up front. Just add it to your request for vehicle price proposals: “In addition, I want the Toyota Platinum 7-year, 120,000 mile extended warranty. And I’ll buy where I get the best total out-the-door price, including the warranty.”

If you decide to buy it weeks or months later, call 9 or 10 dealerships, ask for the Finance Manager and ask for their best price on the one you want. Also, check the internet to see if dealers selling that brand outside of your market or in a different state will offer better prices. Google “Honda (or other brand) extended warranties,” and you may find attractive savings from a more remote dealer.

These two alternatives to factory warranties that are also worth checking:

MBI Policies: Mechanical Breakdown Insurance policies are sold mainly by credit unions. Backed by a large insurance company, they offer direct payment to any licensed repair shop. Coverage is the same as a typical extended service contract: bumper-to-bumper, except for routine maintenance and normal wear items (tires, brakes, batteries, etc.) These policies are often priced according to a vehicle’s repair history. So an MBI policy on a vehicle with an excellent reliability record may cost less than an automaker’s policy.

Unfortunately, MBI policies are not sold in all states or by all credit unions. If you’re a credit union member, ask about this type of policy there.

GEICO Multi-Risk Insurance:  If you have GEICO auto insurance, check out their mechanical breakdown insurance. Key advantages: You can purchase coverage for only 6 months at a time, and you can renew it continuously, up to 100,000 miles in some cases.

No matter what you chose to do, I hope this has been helpful in your extended warranty decision.

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