Extended warranties are everywhere. But whether it’s on a car or an appliance, extended warranties are almost always a waste of money.
The Best Warranty Is a Savings Account
Extended warranties are rarely worth your money. Products don’t break on their own, and when they do, the price of repairs is usually lower than what you’d spend on an extended warranty.
Sure, some people have saved a lot of money with extended warranties. That’s great! But take a moment to ask yourself why a company would offer you an extended warranty. The answer is: because they’re profitable.
According to Warranty Week, a newsletter dedicated to service plans, extended warranties are a $40 billion business. This figure alone indicates that extended warranties are grossly overpriced and rarely used.
In most cases, it’s best to skip the extended warranty and use your extra cash to build up an emergency fund. But every situation is different, and some extended warranties are more useful than others. That’s why we’ve researched some popular products that usually offer extended warranties and explain whether it’s worth your money.
Extended Warranties for Cars Are Scams
Extended warranties for cars are a giant scam. They don’t exist to make people’s lives easier, and they’re not worth your money. Of course, everyone’s situation is different. If you’re offered a cheap extended warranty for a car with a lot of mileage, for example, it might be worth going over the pros and cons.
Dealerships offer extended warranties to supplement reduced prices on the showroom floor, to push people into high-interest, low-payment deals at the last second, and to ensure that people go to dealerships (instead of small businesses and competitors) for servicing. On top of all that, dealerships don’t always honor extended warranties, and most of the money from them goes toward a dealer’s commission, not a vehicular social security program.
The average extended warranty for a car costs between $350 and $750 a year (plus interest, if you add the warranty cost to your loan). And, in most cases, an extended warranty won’t cover routine maintenance (which costs less than $100 a year when paid out of pocket and prevents most unexpected breakdowns).
If you take that $350-$700 and stick it in your savings account, you’ll have more than enough money to pay for any surprise repairs. If you do run into a problem that’s too expensive to deal with (an engine replacement, for example), you can sell your car and use your savings as a down payment on a new one. This way, you also avoid Blue Book depreciation and future breakdowns (after one serious failure, cars tend to suck the money out of your wallet).
