Knowing When an Extended Warranty is Worth it… and When to Walk Away

If you are buying a used car, you may be considering an aftermarket extended warranty as well. After all, a used car could be troublesome and a warranty could give you some peace of mind to avoid potential risk.  But is an extended warranty worth it? Let’s take a look at when they are worth it, and when you should walk away.

In a survey by Consumer Reports, only half of the people who purchase extended warranties actually use it to file a claim, and have the claim covered by the warranty company. So why be cautious? It’s very rare that the premium you pay on the warranty will equal the amount of paid repair claims down the road.

Are Extended Warranties a Waste of Money?

Considering premiums on extended warranties can be so high, and there’s a chance you’ll never even need to make a claim, it can be a waste of money.  Let’s look at some numbers:

  • ½ of people who buy a warranty have filed a claim over the last 5 years.
  • ⅓ of people of buy a used car with extended warranty use it within the first year.

Which means ⅔ used car buyers needed their warranty later down the road, and sometimes outside of their extended warranty contract.  

Instead of buying a warranty, a lot of car buyers are putting that money aside in a second savings account or a “rainy day” fund for when their used vehicle needs work or repairs.

Things to Consider When Looking to Buy an Extended Warranty

A lot of companies who provide extended warranties do their homework… and will charge more for a warranty on a used car because there is a greater likelihood that a used vehicle will need repairs or be at a higher risk of needing service work than a new car. Used car reports like CarFax are great for learning the accident history and service history of a vehicle, but occasionally, the reports don’t cover everything if the accident report was “wiped” before the initial sale.  

So when you looking into buying an extended warranty, there are a few things to consider:

  1. The reputation of the company selling the warranty. Some companies have a well known, nationwide presence, while other are lesser known and may not back up the claims if your car starts acting up.  Be sure to research your options thoroughly before purchasing an extended warranty.
  2. The reliability of your car. If your car is very reliable, then purchasing an extended warranty will prove to be a waste of money. You will spend more money on the premium than you’ll ever need in claims.  If your car is older and perhaps a bit more unreliable, than an extended warranty may provide you with peace of mind.
  3. The type of warranty.  Inclusion warranties should typically be avoided, because they only cover specific parts, and aren’t comprehensive, unlike their counterpart. Exclusion warranties cover all parts except for the ones that are listed. Read each policy very carefully before deciding which one is best for you.

At the end of the day, having an extended warranty can help you feel more comfortable when purchasing a used car. By following our tips, you’ll avoid spending money on a warranty you don’t need or on one that won’t cover the majority of your car’s issues.