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Product Reviews

Extended warranties are an expensive gamble

Dealers will try hard to sell extended warranties, but buyers often don’t see the benefits.

Associated Press/file 2013

Dealers will try hard to sell extended warranties, but buyers often don’t see the benefits.

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 pay for the added warranty.

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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. On average, those who did use it spent hundreds more for the extended warranty 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 was $837. Based on a $1,214 average initial cost, that works out to a net loss of more than $375.

For 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. Only about a quarter of respondents said they would definitely get extended coverage again.

Conducted 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. Consumer Reports targeted those years to focus on vehicles that are typically no longer covered by a traditional three-year new-car factory warranty.

Reliability and satisfaction

The car owners most satisfied with extended warranties 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 Consumer Reports’ 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.

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. 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.

Instead of buying the warranty, Consumer Reports recommends investing that $1,200 in an interest-bearing account. That way, you’ll have an emergency fund if a postwarranty 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.

Consumer Reports writes columns, reviews, and ratings on cars, appliances, electronics, and other consumer goods. Previous stories can be found at consumerreports.org.
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