Dear Expert: Should I buy the Extended Warranty for my Car?

Consumer Courage received its first official question this week from the ‘Ask the Expert’ section of our website.  The question is about Extended Warranties.  In most cases, an extended warranty is not an actual warranty at all.  It is really an ‘extended service contract’ (or ‘ESC’) because it is a contract between the Consumer and some other company to provide a service (to fix the item that was sold, under certain conditions). Here it is:

When I bought my car a few years back, the purchase price included a warranty for service for a couple of years. The factory warranty has expired, and I am getting notices re: extending warranty – there’s a gradation of what’s covered. There is no price – just a 1-800 number to call.

Generally – what do you think – is buying into extending warranties for service on things like cars a good or bad idea?

The short answer:

Extended warranties are not worth the money, often don’t provide blanket coverage, make more money for the salesman and are a BAD IDEA.

The long answer:

While the question above is about car warranties, the answer provided below can be applied to ESCs for all types of consumer products.

(WARNING: If you do decide to buy an extended service plan for your car, be aware that some scam artists make their money selling consumers bogus ESCs.  According to an FTC alert about this subject, consumers respond to a letter that looks legit and pay for the new plan over the phone, only to realize later that they paid thousands of dollars for nothing) 

Perhaps the most revealing thing that you need to know about ESCs is the following: A large portion of the money that you pay to buy the ESC (and get yourself that ‘peace-of-mind’ that the salesman mentions) goes into his pocket. Indeed, the markup on an after-market ESC at auto-dealerships is usually close to 100%.  In other words, nearly half of the money that you pay to buy the ESC goes to the salesman! (i.e. – if you pay $1,600 to buy an ESC for your new car, $800 of that is the commission that goes to the salesman as a reward for getting you to buy the ESC)  

Why is this important?  If the ESC company is willing to give half of the purchase price to the salesman, they must not be too worried about having to pay for your repairs.  Ironic, isn’t it?  They are not worried about having to pay to fix your product; But, they try to get you worried enough to by an ESC in the first place.     

Consumer Reports has a few articles that shed light on the decision of whether to buy an ESC; including a survey of 8,000 of their readers who purchased one.  The survey shows that most people who bought an ESC lost money, because the total amount paid to buy their ESC was less than the actual amount of the repairs that they had to make.   

There are a few very good reasons why NOT to buy the service plan:

  • They pick the repairman – it is common for the service contract to specify that the repairs are to be done by certain ‘pre-approved’ repair services. This could create delays, confusion and denials of coverage.
  • Parts not covered – oftentimes, the part that needs to be repaired is ‘not covered’ by the warranty.  (Some auto warranties even have a clause that says if a ‘covered part’ fails because of the failure of an ‘uncovered part’ the warranty doesn’t apply)
  • Not worth it – the cost can be too large, when compared to the cost of the item.  If the DVD player costs $120.00, it doesn’t really make sense to pay $50.00 for a service contract?
  • Warranty company may go out of business – most companies that sell you the ESC are third-party vendors (ie – NOT the seller or manufacturer of your product).  If they go out of business, you will have a hard time trying to get anybody to honor the ESC.
  • The ESC may overlap the manufacturer’s original warranty – most products come with manufacturer’s warranties (as do all new and some used cars).  If the fine print on the service contract reveals that the clock starts ticking when you purchase the item, the ESC may not last as long as you were led to believe.  
  • Your credit card may have a safety net – this is worth a call to the credit card company. (For credit card purchases) Some cards provide warranty coverage that extends beyond the manufacturer’s warranty (if you save the original paperwork and the warranty information) as an incentive for you to use their card to buy the product. 
  • Exclusions – this refers to items or parts listed in the ESC as ‘non-covered’ items.  If a ‘non-covered’ item is what broke, you’re outta luck.
  • Deductible – this is how much you will have to pay to start the repairs.  Many people are surprised to learn that they have to pay money for the repair IN ADDITION to the cost of the ESC.  

Here are some questions to help you decide whether or not to buy that ‘extended service contract.’

Questions to ask yourself:

  1. How much does this cost, compared to the cost of the thing that I’m buying?
  2. How much can I save for a repair in the time it takes for the original warranty to run out?
  3. Are they pressuring me to buy this ESC?
  4. Are they trying to protect me, or their sales commission?

Questions to ask the salesman:

  1. What are the exclusions?
  2. What is the deductible?
  3. How do I bring a dispute, if the company does NOT pay for a repair?
  4. How much are you getting to sell me the extended service contract?

Be careful when you consider an Extended Service Contract.  The peace-of-mind that you purchase should be yours!

Posted by: Mark Wiseman