Extended car warranties: An expensive gamble

Looking for an easy way to save hundreds on your next new car and simplify the buying process at the same time? Skip the extended warranty. The dealer will probably try hard to sell you one, telling horror stories about the thousands of dollars it can cost to replace an engine or transmission. But the odds are you’ll never need the coverage, and even if you do, the money you’ll save in repairs won’t come close to what you paid for the added warranty.

A recent Consumer Reports survey found that 55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was just over $1,200. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.

Among survey participants who used their policy, the median out-of-pocket savings on repairs covered by extended warranties for all brands was $837. Based on a $1,214 average initial cost, that works out to a net loss of more than $375. Factoring those who didn’t use their policy, the median savings was zero. And that may have something to do with why satisfaction with auto­mobile extended warranties is among the lower rated of all products and services surveyed by Consumer Reports, and why only about a quarter of respondents said they would definitely get it again.

Conducted by the Consumer Reports National Research Center in late 2013, the survey included responses from more than 12,000 Consumer Reports subscribers who purchased an extended warranty. The survey covers vehicles built during model years 2006 to 2010. We targeted those years to focus on vehicles that are typically no longer covered by a traditional three-year new-car factory warranty.

When we asked car owners whose extended warranties had taken effect how satisfied they were with their experiences, the most satisfied were primarily owners of less-reliable brands, including BMW, Chrysler, Dodge, and Mercedes-Benz. Those are all brands that have had average or below-average reliability in our Annual Auto Survey. Interestingly, some of these brands also had the most expensive extended warranties, with Mercedes-Benz owners paying $2,200 on average, followed by BMW owners, at $2,007, and Chrysler owners, at $1,525.

The reason for those owners’ higher satisfaction may be that they tended to use the coverage more often than owners of cars from historically reliable brands. That probably helps consumers feel more justified about having spent money for the coverage—a bittersweet way to rationalize the purchase. BMW owners were more likely to have used the coverage than any other brand we rated, with 71 percent saying they had done so. Chrysler owners were next, at 65 percent, followed by Dodge, at 63 percent, and Mercedes-Benz, at 60 percent. Still, even among this group, only around 40 percent of owners for each of the four brands said they would definitely buy the coverage again.

Conversely, owners of Hondas, Subarus, and Toyotas—perennially high-ranking brands for reliability—were among the least satisfied overall with their extended warranties. They were also far less likely to have used them, compared with owners of most other brands’ models. Just 39 percent of Honda and Toyota owners reported having used their coverage, followed by only 36 percent of Subaru owners. Not surprisingly, owners of those brands were among the least likely to say they’d definitely purchase the coverage again; less than a quarter of policyholders for each make said they would do so. “100,000 miles came and went, and the car never needed any repairs other than regular maintenance. What a waste! I will never buy another extended warranty for a car,” said Honda Civic owner Liz Garibaldi.

Available for both new and used vehicles, extended warranties are normally pitched as extra security for car buyers, reducing the risk of expensive repairs that might not be covered by the factory warranty. ­Indeed, peace of mind was the most common reason given by our survey respondents for purchasing the coverage, and for many that may be a sufficient motive.

Many types of plans are offered, both through dealerships and from other sources, such as auto clubs and insurance companies. And most extended-warranty-service purveyors offer more than one plan, with everything from comprehensive bumper-to-bumper coverage to more targeted protection for the powertrain only or specific components. Plans can also vary in duration, with most providing three to five years of coverage.

Our survey results indicated that costs are similar regardless of where the coverage is purchased; there was no more than about a $100 difference between factory and third-party programs. Of those who purchased an extended warranty, 86 percent did so at the same time they bought their car. One of the reasons to do so is the convenience of rolling the cost into the car loan. That costs more money in the long run, however, because you have to pay interest on the warranty’s fee.

Survey respondents who purchased auto­maker-backed coverage through a dealership were substantially more satisfied with the policy than those who purchased coverage from a third party, with 53 percent and 41 percent, respectively, saying they were highly satisfied. But even those customers were not much more likely to buy such coverage again. Less than 30 percent of all respondents who purchased an extended warranty said they would definitely do so.

More than 60 percent of survey respondents who purchased an extended warranty opted for bumper-to-bumper coverage, and buyers of that type of coverage were more satisfied than those who opted for other, less comprehensive plans. Beyond covering more potential faults, bumper-to-bumper warranties are more likely than powertrain warranties to include helpful extras such as repair-related reimbursements for towing charges or rental-car coverage.

We also found that respondents who bought an extended warranty were more likely to have had their car repaired during the lifetime of their policy than those who did not buy the coverage. That may be because those who opt for the coverage tend to be more meticulous about maintenance, or it might simply mean they wanted to get their money’s worth. In either case, it may suggest that a car previously covered by an extended warranty would be more likely to have received better maintenance than one that did not have the coverage.

An extended warranty can limit the risks of expensive surprises. But such comforting protection might lead many owners to buy an extended warranty, only to have regrets later. Both our survey findings and our reliability analysis underscore that the smart money points to simply buying a reliable car and properly maintaining it. With diligent care, following the guidelines in the owner’s manual, any of the cars that shine in our reliability Ratings should improve your odds of virtually trouble-free driving, without the added cost of an extended warranty.

Instead of buying the warranty, invest that $1,200 in an interest-bearing account. That way, you’ll have an emergency fund if a post-warranty problem arises. And if your car doesn’t need pricey repairs, you’ll already have the money for a down payment on your next car.

Even if you’re considering an extended warranty, be wary of any solicitation you get through the mail or over the phone. Scammers have found that the warranty business can be very lucrative, and the Better Business Bureau has received thousands of complaints from consumers who have been stung. Typically, the questionable outfits contact an unsuspecting owner whose warranty has just expired or is about to expire.

"The impression they want to give people is that they are contacting them on behalf of their dealer or manufacturer, or they are associated with them, which, in fact, they are not,” says Michelle Corey, president and CEO of the St. Louis office of the BBB.

Once they’ve taken the bait, the unfortunate victims often find that their problems have just begun. “They’re not able to read the contract until it’s mailed to them,” says Corey. “They don’t see the conditions, the limitations, or exclusions. Then when they try to use it, they’re informed that pre-existing conditions don’t apply, or they’re told they don’thave maintenance records showing that they followed the manufacturer’s requirements for upkeep.”

The final insult comes when unhappy customers try to get a refund, and they are either refused or only given a prorated amount based on when they signed the contract.

The first step to take to defend yourself against this type of fraud is to contact your dealer to ask whether whoever is trying to sell you coverage is associated either with them or the carmaker. Also ask whether your original warranty really has expired to avoid paying for redundant, overlapping coverage.

Moreover, don’t give your credit-card number or commit to anything over the phone or through the mail without seeing a contract and reviewing what is covered first. And be sure to keep maintenance records and receipts for future reference. Beyond warranty concerns, it may help in selling your car down the road.

Peace of mind comes at a price. If you opt for an extended warranty, consider these smart-buying tips.

Don’t buy under pressure. Dealers often try to sell the convenience of rolling coverage into a new-car loan, but that means you may be paying up front for coverage that you already have with the factory warranty. You can purchase an extended warranty after buying the car, although you may find the cost increases as the vehicle ages.

Don’t be afraid to bargain. Among those who purchased an extended warranty, only a third of our survey respondents tried to negotiate a better price for their contract. Most of those who did haggle were successful, saving about $325 on average.

Shop around. You don’t have to buy an extended warranty through a dealership. In fact, you may find a better deal through your auto club or insurance company. But consider this: Satisfaction in our survey was highest among those who bought an automaker-backed warranty.

Go all in. Our survey found little difference in cost between limited and bumper-to-bumper coverage, which is more likely than powertrain plans to include reimbursement for towing, travel expenses, and a rental car. If you’re going to buy, get the full protection.

Read the small print. Before signing, be sure you understand what is covered and where you can take your car for authorized service. Third-party warranties, especially, may have notable restrictions on approved shops. Given how many dealerships have closed in recent years, the availability of participating repair shops is a particular concern.

Consider an extended warranty for the long haul. All cars tend to become less reliable over time, so an extended warranty might be worth considering if you’re planning to keep your vehicle long after the factory warranty runs out.

Visit our 2014 Autos Spotlight special section to find all of our new and updated articles, including Top Picks 2014, Who makes the best cars, Best & worst new cars, Best & worst used cars, Used car reliability, The road to self-driving cars, and New car Ratings & road tests.

This article also appeared in the April 2014 issue of Consumer Reports magazine.

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