CrazyAl

OK, if you buy an extended warranty there are three possible outcomes:

#1. You spent more money buying the warranty than you get back in warranty service costs: either nothing breaks, or things do break but the cost of repairs is less than the warranty price. In this case you LOST MONEY.

#2. You spent about the same on the warranty as the warranty pays out on repairs. In this case you more-or-less break even. Except, that you paid the money up front. In this case you basically gave a zero-interest loan to the warranty company. (Why would you do that? Put the money in an interest-bearing account instead)

#3. If you buy the warranty and then your car needs major work (and the warranty covers it) then you've "made money".

So basically it all comes down to what are the expected costs of repairing your car compared to the cost of the warranty plan. If Situation #1 happens, then you are loosing money. If situation #2 happens, it's pretty even. If situation #3 happens, then you've come out ahead and you saved money.

I say this is "gambling" because you don't know exactly what is going to happen to your car. Maybe your car will go 75,000 miles without needing a single repair. Maybe it will turn out to be a lemon that is constantly in the shop.

BUT, the warranty companies know this. They have supercomputers, databases, and actuaries that spend all day tracking failure rates, average cost of repairs, and so on. They know the expected cost of repairs of a certain car based on the empiricial history of that vehicle and similar vehicles. They use this information to set a price for the warranty plan. For example, let's say they are looking at 1000 "model X" cars. They add up the repair costs of all those cars. Of course, for many cars this will be a low amount. And for other cars (lemons) it will be high. But they get the total, and then average it out per car (total $ for ALL repairs divided by 1000). They then have an expected "pay out" for a particular car. Of course, they then set the price for the warranty ABOVE the expected payout.

It's just like a store owner. The guy that runs the local Kwik-E-Mark buys cans of beans for $1 each from his wholesaler. He sells them to you for $2, making $1 in the process. The Warranty Comapany sees your warranty plan as an expense. But they "mark it up" and then pocket the difference.

So, for most people who don't have a lemon and won't have catastrophic problems, they are paying out much less money in repairs than they are charging you in fees (Situation #1). For the unlucky guys that get the "bad" cars, the warranty company is loosing money.

Now, these guys aren't dumb, and these companies have been in business for a long time. Why is that? Becasue they are making a profit. And they make a profit when situations #1 and #2 happen more frequently than situation #3. They already know in advance, based on their sophisticated mathematical models, how much they are going to have to pay out. They know that for some people they are going to loose money--and they do it because for MOST people, they are making a tidy profit.

Now, I don't know how many cars end up in category #1 and how many end up in #3. But, it is an IRONCLAD FACT that the expected cost of repairs is less money than the price of the warranty. We know this to be true becasue if it wasn't true, then nobody would be selling said warranties. All casino games have odds in the house's favor. That's how they make money. Would Vegas offer a game in which the customer was more likely to win than loose? Of course not.

Now, some people are going to say, "well what about Fords, I mean, they have a history of shoddy quality control". Or "I wouldn't buy a plan for my Honda, but I will for my Ford". It doesn't matter. Sure, different cars have different reliability expectancies. But all that does is determine the extended warranty PRICE. In other words, let's say for the sake of argument that Hondas are "reliable" and Fords are "unreliable". This means that the extended warranty for a Honda will be cheaper than that for a Ford. But in both cases, PRICE OF THE WARRANTY WILL ALWAYS BE HIGHER THAN THE EXPECTED COST OF REPAIRS.

I will sum this up as quickly as possible:

A warranty plan is a bad move becasue it is a loosing bet, just like buying lottery tickets. You are statisically likely to loose money. The proof as to WHY this is true is becasue someone is offering to sell you the plan. Nobody is going to sell warranties unless they make a profit off of them. That's it.

dtuna42

If I paid "too much" for my warranty, so be it. I bought the car for invoice ($27,121 vs $29,220 MSRP). Nobody can say that I got a bad deal, because even if you add in 100% of the warranty (Which obviously you can't) I'm still under sticker. I know of a lot of '05 owners who paid thousands over MSRP.

Plus, I've gotten my money back in previous warranties at the dealership I use. They've always covered everything and never complained about bolt on mods. I'll be buying one with every car. I feel much better budgeting my repair costs. I don't see it as a gamble, I see it as a budget. It's much better for me to carry a small monthly fee added into my car payment than it is to risk the chance of needing a large sum of cash for a surprise breakdown with no notice.

Like someone previously stated, it's personal preference.

One more thing I forgot: That's not entirely true about how the warranty carriers make money off of your payments. The place where most financial security companies (life ins., car insur. car warranies, etc.), is through investments and loans. They pool the payments together and large sums of money to work making more money, and they use these proceeds to pay off their losses in insurance / warranty payments. Plus, the other side of the gamble you say your losing, you have to consider that while all of the other customers are chipping in to make your fee lower, your all alone with the repair bill(s) when it's time to pay if you're the one lucky enough to suffer a breakdown.

bl1nk

Bought the 6 year, 100k warranty from my dealership it was 1450. Bought the xenon or whatever protection thing, that was 500 and then got the oil,tune ups, all the maintenance paid for 6 years 100k that was 2000

steve vercolio

I was going to buy the extended warr. on my Trans-am back in 1999, my brother-in law said he would give it to me at cost- AT COST! You guys make money on that too,I told him. Yeah, he says. Well, if you don"t buy it when you buy the car, they will look at how many miles you have put on it since you bought it. In 2002, I only had 5000 miles on it, and they would only offer the 100,000 mile warr. because they knew I was going to beat them on the miles. That"s how it works, they don"t know how many miles your going to put on the car when you buy it, but if you wait then they will know.

LEJAY

WTF was that ?
5000 mi in3 years, (must not have been worth drivin) = 100,000 in 60 years, (it only goes 60 / 72 months max.)
Who beat who ???
Makes sense DUH, "we won't know how many miles you are gonna have until you put the miles on, then we'll know"

TempleOfDog

If you regret buying it, take it back and get a refund. The manager will try to talk you out of it but you can get a refund for it.

06GT4RAD

7/100k ESP Premium or whatever they call it. It is the best one you can get. Paid 1600

Richard

Andys06GT

they may be in their favor, and sure, if they make more money thats great, but for me, if i have to pay out 1200 bucks over 3 years, thats a lotta cash for ME. they can afford to do what they want, i on the other hand, cant afford a fluky transmission. its peace of mind that while im paying for a car, its bumper to bumper covered. my 100k milewarranty was free due to a ****ty salesman. but id have gotten it eventually anyway. i didnt have a warranty on my last truck past the 3/36, and at 38 my starter died. hahaha funny huh? nice f-150 and it just didnt work. and heres the funny thing, if i had bought the 6/100k off the bat, it woulda been 1750. after the 36k was up, it was over 2600, and if i waited till right before it was up, 2300. so really, would it have saved money? naw, cost more. now ive had to repair the car, AND if i wanted the coverage paid more. again, peace over price anyday.

hammeron

Thanks CrazyAl for the great explanations....I like your
suggestion to wait until you get close to the 3/36 point and
then make a choice....good info


"If you are going to buy a warranty, then DEFINATLEY wait until
your factory warranty is getting close to running out. You'll be better
equipped to make the decision at that time, and you're maximizing
the utility of the warranty. "