If you are planning on driving at least for 100,000 miles, is extended warranty worth it?

asksergeaskserge Member Posts: 3
edited September 2016 in Toyota
What are your thoughts on this? If you think it is, share a personal example of why.

Answers

  • karhill1karhill1 Member Posts: 164
    The key is to understand how those extended service contracts (they are not a warranty) are priced. This pricing is simply basic cost accounting, something I have done for decades.

    The provider of the service contract employs a staff of knowledgeable people who determine how much money the provider will pay out for each of the service contracts. For example, this may be $700 on average.

    The provider will then add a profit layer, for example $500. The provider will sell the contract to the dealer for $1,200.

    The dealer and its F&I manager will then add additional profit to this, often as much as 100 percent. In this example, the dealer will offer the contract to the buyer for $2,400.

    That smiling F&I manager, who is well trained in the use of props and examples, will work his or her magic to convince the buyer the contract is absolutely necessary. Google F&I managers to learn about the tricks these F&I managers use to sell such products.

    While these numbers are merely an example, they do demonstrate the actual value of the service contract to the average buyer.

    So, in this example, the buyer will pay the dealer $2,400 for a product which the experts predict will only pay for $700 in covered repairs.

    In the end an extended service contract is nothing more than a gamble. And, as in Las Vegas, the game is rigged against the buyer.

    Any car buyer would be far better served to take the $2,400 or so the dealer asks for the service contract and put the money into an interest bearing account. Should a repair be needed the money is available. Should a repair not be needed, the buyer has the money and not the dealer, its F&I manager or the service contract provided.

    Of course there will always be some people who benefit from an extended service contract. However, if every buyer of a service contract recovered more than he or she paid for the contract, the provider of the service contract would not remain in business.

    Most folks who buy an extended service contract will not recover the money they paid for the contract.
  • Mr_ShiftrightMr_Shiftright Sonoma, CaliforniaMember Posts: 64,482
    The Extended Warranty is actually a BET...the insurance company or underwriter is betting that your car will not break, and you are betting that it will.

    Like any other type of bet, you will find some purchasers of extended warranties are "winners"---the casino or lottery or raffle pays off. However, given that the underwriters have done the math very carefully, and are generally profitable enterprises, we have to assume more losers and winners....sometimes many more losers than winners.

    So the question becomes: "Are you feeling lucky enough to bet on your car breaking down"?

    We can see also how some extended warranties cost a lot more than others, depending on the make of car. That's because some cars have a better chance of breaking, so the underwriter charges more for the risk.
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