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Warranties of all sorts earned a bad name in the 1990s and with good reason. Amid declining profits and increased competition, retailers started marketing 'peace of mind' products to consumers - insurance contracts they called warranties. For retailers the profit margins on these plans were enormous often exceeding 70%. Compare that to the 20% profit margins on electronics and the 5% margins on cars. With warranties, retailers were often able to double their profit of on a transaction.
That might explain why the sales guys aggresively push warranties on every major purchase you make. Many consumers soured on buying warranties because of bad experiences with uncovered items or providers that went belly up. Others began to see warranties for what they are - exhorbitant mini-insurance policies designed to maximise retailing profits.
Take extended warranties on cars. Most new cars now come with excellent bumper-to-bumper warranties from the manufacturer. But the dealers still pitch extended warranties and, for one bad reason or another, some car buyers still fall for the 'peace of mind' pitch.
When you consider the constant increase in product quality and reduction in maintenance expense, it's simply amazing that anyone feels the need to 'super size' their car warranty. If you've done your homework and found that the car you want has a terrible service record, pass on it and start looking at other models and manufacturers. But if you're just afraid of getting sticker shock from a repair bill at the dealership, the dealer isn't the only place you can maintain or repair your car. You might save up to 50% off of dealer prices just by going to an independent certified service shop.
If you're really dead set on purchasing a warranty, never buy it from the dealer. You can probably get a much better price online and there's a good chance it's from the same company. There are companies online such as WarrantyDirect that will save you a lot compared to the dealer and they also offer plans for newer and high mileage cars. Make sure you conduct due diligence on the warranty company just like you would with an Insurance company. Read the warranty very carefully and understand the kind of additional coverage you're getting. Verify that the company puts your money into a reserve account in case the company goes out of business (which many did). Google the company name to look for complaints. An established company doesn't honor its warranties will have dozens of people blogging about their terrible service.
Lastly, you can always setup your own reserve account. Let's say it will cost you $800 for a warranty. Instead of paying it to the insurance company, put it into an account that you can draw on if you have a car problem. $800 at an can go a long way at an independent car repair shop. And if you don't need it, I'm sure you'll find other uses for it. Even if your repairs cost you $1,200, is it worth buying an $800 policy to protect you against a potential $1,200 expense.
Extended warranties on cars just don't make sense. That's one of the reasons that the dealer is willing to bargain on the price. So if, for whatever reason, you want to buy one from the dealer, make sure you drive a hard bargain.
For the timid who just can't say no - there is a way to stop the dealer from making his 'peace of mind' pitch. Just tell him that the reason you're buying the car is because it has a sterling reputation and comes with a great standard warranty. It works everytime because it's not something he's likely to argue with.
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