The current landscape behind purchasing extended warranty for a car isn’t what it used to be 10 or 20 years ago. It isn’t that extended warranties have changed at all, but it is more of a shift in automotive manufacturing priority in the recent years. When you speak with the mechanics and enthusiasts about cars manufactured recently, they will tell you that car companies no longer build cars that last. They now focus on building aesthetically pleasing cars that are “good enough”.
Is Extended Warranty Worth It?
Unlike the past where the answer was extended warranty is never worth it, the answer these days is “it depends”. The two primary factors to consider is something we call ability to pay and likelihood of incidence. These two considerations are mutually exclusive and weighed together can give you the answer on whether or not extended warranty is worth it for you.
The consideration of “ability to pay”, takes into account your personal finances and whether or not issues down the road will leave you with a problem that can only be solved with a payment you cannot afford. For instance, if there are transmission issues on a used car you purchased last year, you need to be able to fix it otherwise your car is both unusable and unsellable. Transmission repairs average out at approximately $5000 dollars. While this is a worst case scenario, it is important to understand the concept of “ability to pay” when deciding whether or not you will opt for extended warranty. Extended warranty while it may be a net loss on average for most car owners, might be worth it for you when you cannot afford the downside.
The secondary and perhaps more important consideration of “likelihood of incidence” looks into the reliability of the vehicle. Vehicle reliability even for the same year, make and model can vary greatly depending on how the vehicle was driven and cared for. While there is some due diligence you can do when purchasing a vehicle to get a glimpse of vehicle care, we suggest relying on statistics when doing this thought experiment. If you look at the reliability ratings for the year and make of the vehicle, you can quickly see which years and which brands you should be careful purchasing. By taking multiple factors into consideration towards likelihood of incidence, you can once again, factor this into the decision of purchasing extended warranty or not.
Statistics behind Extended Car Warranty Use
The nature of warranties is that the business exists because the customer, on average, has negative expected value on their purchase. What this means is that for every 1000 dollars a customer puts in, they will on average get less than 1000 dollars back in compensation. Consumer Reports did a study on this in 2013 and found that 55 percent of extended warranty purchases did not claim anything in the duration of the warrantied period. The remaining 45 percent of car owners that did file a claim and receive repairs, on average, said that the amount they spent was less than the amount paid in their policy.
The fact is, the numbers say that it isn’t worth it on average. However, not all cases and not all cars are made equal. There are considerations that need to be made like the previously discussed ability to pay and likelihood of incidence.
Different Types of Extended Warranty for Cars
Not all extended car warranties are the same. There are great differences between manufacturer warranty and third party warranties. Even among these two groups, different companies and brands have different limitations, restrictions and compensation terms for when the customer is trying to make a claim. The discussion on the types of extended car warranties is covered in further detail on its own page.
Reliability of Modern Cars
Decades ago cars went through a period where they were very unreliable and the used car market was littered with lemons by car owners who do not know how to take care of a vehicle. This period was followed by a focus on reliability by auto manufacturers and a very high car ownership percentage for major cities. We are now entering a new era where the globalization of the world has ushered in a new culture of immediacy, exploding tech and hyper competitive auto industry landscape.
The culture we live in currently also focuses on the “new” and the next best car to own. Very few people keep their car for 10–15 years and “drive them into the ground”. That concept is now starting to become foreign and the auto manufacturers have picked up on it. The general consensus is that cars aren’t built to last anymore. Speak to any mechanic about the differences between a Honda Civic made in the year 2000 vs. the 2016 and they will tell you they don’t make them the same anymore.
Effort Required When Making a Claim
While it may seem odd, there is a good percentage of people who purchase the extended warranty but end up being too lazy or not having the time to actually go through the process of making a claim. The warranty companies don’t make it easy for you to make a claim on your warranty. They will ask you to go through hoops and paperwork during the claim process. Therefore it is important to consider your own initiative and commitment: are you the type of person to follow through with making a claim when your life is in crises because your car no longer works?
The Verdict on Extended Warranty
We believe that extended warranty can now be considered depending on your situation and the car that you are purchasing. There is a lot of due diligence that you need to do before picking the right extended warranty, questions to ask and research to be done. We highly suggest going through our website and reading up on our other articles regarding extended warranty for cars.