I’ve written fairly extensively about the trials and tribulations of owning an old Volkswagen Touareg.
Long story short, I’ve had my fair share of faults, errors and problems with my “cheap” 4×4 purchase.
However, in today’s article I want to discuss a particular aspect of ownership in a bit more detail – the value and worth of a used car warranty.
When I purchased the Touareg, I paid the princely sum of $1500 (off the top of my head) to add on an extended, aftermarket warranty.
I wasn’t born yesterday, and I know that any relatively high-mileage old luxury European car is a recipe for potential disaster, so I thought the warranty would be a good option.
I’m fairly adept at reading terms and conditions, so I thought I knew what would be covered and what would be excluded as well (although for shame, I read through this fairly quickly ‘under pressure’ in the salesman’s office).
The particular warranty policy I purchased was a Provident ‘Classic Cover’ warranty, technically known as Mechanical Breakdown Insurance (MBI)
Three years later, and the warranty is nearly finished. With that in mind, was my purchase good value for money?
Long story short, no it wasn’t. You can finish reading now, and go about your merry way.
In fact, it was a terrible buy, and I’ll go into the numbers to explain why if you prefer to keep reading.
In this article I’m going to look at whether or not a used car warranty is a good deal, and also effectively review the XYZ policy at the same time.
Table of Contents
Policy Cost Versus Policy Payout
The policy cost me $1500, and I’ve been able to claim exactly $0 despite numerous problems and repairs required on the car.
In other words, I’ve had a 0% return on investment on this policy. Even some of my forays into cryptocurrency have been more successful than this from a financial return perspective!
Hypothetically the math could have worked out very differently; I could have wound up claiming for a gearbox failure or a total engine seizure or something like that (that actually was covered – more on that point later) and I would probably be humming a different tune, but ultimately the policy was a waste of money for me.
How Have I Claimed Nothing On My Extended Warranty On A Car That Has Been So Unreliable?
Put two and two together and you get four, right?
How is it then, that I’ve had what is ultimately an unreliable vehicle with an extended warranty and I haven’t been able to claim a penny?
To explain how, I’m going to regale you with the tale of various problems I’ve had with my Touareg and why I haven’t been able to claim anything against them on the warranty:
- On the first day I picked up the Touareg, the car developed a check engine light. It turned out the throttle body position sensor had failed. The dealer offered a complimentary three month warranty on the car (with the extended one kicking in after that time) so they covered this.
- About 4-5 months after buying the Touareg, it left me totally stranded in Queenstown, the adventure capital of New Zealand. My wife and I had driven about six hours, and at our final stop just outside of town I started the car and it just started jerking like one wheel was locked. As it turns out, one wheel was locked. The AA/roadside assistance weren’t able to help, but they paid for the Touareg to go on a recovery vehicle and covered a rental car for the drive home. My extended warranty didn’t pay out here because once again the dealer picked up the bill … although not before trying to convince me to use the warranty (but I stood my ground and quoted consumer law). The actual failure wasn’t that expensive to fix – around $400 for a new brake sensor.
- Around a year after purchase, I took the Touareg in for a road safety check/‘warrant of fitness’. It needed about $2000 in ball joints and other suspension work, but the warranty wouldn’t cover this as it was considered ‘wear and tear’ and not an acute failure.
- Most of the other problems with the car had been $500 or less to fix, so basically lower than the cost of the excess meaning no point in claiming on the warranty OR the problem was something that wouldn’t be covered, e.g. regassing the air conditioning or having the transmission serviced.
- Most recently, the steering angle sensor failed. A new genuine part repair was going to be the best part of a couple of thousand dollars. The Volkswagen specialist I take the Touareg to worked through the paperwork with the warranty company, but the repair claim was denied (I was insistent that work did not commence until the warranty claim was approved in advance). Why was the repair rejected? It turns out that technically the steering angle sensor is part of the wider airbag assembly, because the sensor – the ‘clock spring’ sensor – sits inside another component that houses the airbag, or something along those lines. The warranty policy doesn’t cover the airbag system, so the warranty claim was rejected on a technicality. In the end I settled for a used unit and about a $900 repair bill.
So you can see how a car that has incurred thousands of dollars in repair and unexpected maintenance bills has had a warranty sitting there gathering dust.
Provident Insurance Extended Warranty Review
The fundamental problem I have with this warranty – and seemingly most other third-party extended warranties – is the ‘information asymmetry’ factor. I bought an extended warranty because I know enough about cars to know that an older European luxury 4×4 is a potentially risky buy. I’m not a mechanic, and in the example of the failed steering clock angle sensor that is actually part of the airbag assembly (on a technicality) how on earth was an ordinary person such as myself ever likely to know this?
You have to bear in mind that extended warranty companies are really offering mechanical breakdown insurance, and like all insurers that want to turn a profit and not go broke the business model is hoovering up as many dollars in premiums as possible and then using every possible trick and technique – no matter how shady – to try and get out of paying. Nice work, if you can get it, to quote Frank Sinatra.
Therefore, I review the Provident extended warranty/MBI policy poorly, because not only are there a relatively large number of listed exclusions, but unless you have an encyclopaedic knowledge of the car you are considering purchasing and everything that might possibly go wrong with it and you have a legal degree with the competence to understand every single term and condition, it’s entirely possible that what to a layperson should be a covered repair is weaselled out of owing to a technicality.
Outside of a very clear covered failure such as the gearbox blowing up, there’s every risk that if some errant sensor fails or some other electrical malady occurs (which is often the more likely scenario on more modern vehicles, where sensors and electrical problems tend to be more common than outright mechanical component failure) you might think you are covered but you simply aren’t. There’s also too much grey area in the sense of a failure occurring where part of it might be mechanical but part of it might be some sensor that is somehow connected to a part of the car that isn’t covered; another opportunity for the company to wriggle out of paying you.
I guess you could argue that the policy buyer should be aware of this, but ultimately these policies are aimed at ordinary people who want to trade a bit of cash for some protection and peace of mind, and I don’t think it’s reasonable for an ordinary purchaser to be expected to do this kind of research before buying a car.
I’ve got a few months left, so this might all change; I could wind up making use of the policy but I doubt this will happen.
If I had my choice over again, I wouldn’t buy the warranty and would just take a punt on the reliability, keeping aside some additional cash for out-of-pocket repairs if needed. In fact, on further research, Consumer NZ which is my country’s consumer protection organisation warns motorists against buying most third party warranties owing to the fact that most faults should be covered for a reasonable period of time by the dealer and also most warranty policies are barely worth the paper they are written on when it comes to claim time.
Conclusion – Should You Buy An Aftermarket Extended Warranty?
Ultimately, it comes down to the quality if the policy. In my case, the warranty was a poor deal. It seems that these ‘Mechanical Breakdown Insurance’ policies (remember that you are really buying an insurance policy and not a warranty per se) often have a huge number of get-out clauses and relatively unfair conditions.
Dealers put these warranties for a couple of reasons:
- They are a great profit maker and can seriously add to the bottom line. A friend of mine in the trade says that warranties are typically resold by dealers with a 100% markup.
- If a customer takes out a warranty and a fault develops, the dealer will often try to encourage the customer to claim on the warranty (maybe offering to help with the excess) as opposed to fixing the problem out of their own pocket. This is exactly what the dealer tried to do when it looked like a serious issue occurred when the Touareg broke down and left me stranded on a road trip.
Of course not all warranties are created equal.
From what I can tell, buying a used car with an “approved used” warranty – this will typically be called different names in different markets and by different brands – is a much better deal. You’ll often get a warranty as good, or nearly as good, as a new car warranty, although there might be some requirements in terms of having your car serviced by the dealer from where you purchased your car.
For example, here in New Zealand Toyota run a popular ‘Signature Class’ program that basically allows you to buy a used Toyota that has been inspected, serviced and approved by a main dealer and with which you get a fairly robust warranty.
On the other hand, ‘no brand’ dealers (who don’t specifically retail a particular brand) will typically offer aftermarket warranty/MBI policies from third party companies. These are the policies where owners seem to have the most problems and enjoy inferior value for money.
As far as I understand, in some markets like the United States there are also chain dealers such as CarMax that offer more generous warranties. You might have even seen that classic Doug DeMuro video where he goes through all of his warranty claims on a Range Rover, and the bills are eye-watering.
So sometimes warranties can be worth it BUT not all warranties are equal and you need to understand that it is critical to:
- Understand exactly what the policy covers and what it does not
- Do some research to see if there are common failure points on a vehicle you are considering buying that might somehow wind up being excluded on further investigation. You can’t win all the time here, but you might be able to protect yourself somewhat (as mentioned above, how on earth would I have known that a steering sensor would technically be part of the airbag assembly)
- Understand excesses, policy limits, and whether consumables are included as part of any repair
- Determine what is required in terms of maintenance to keep the warranty valid. If you are handy mechanically, then the savings you can make by DIYing maintenance and repairs (which typically isn’t allowed for a warranty) might offset any potential value.
- Haggle HARD on the warranty/total vehicle cost. My understanding is that dealers make some fat margin on these policies, and they can afford to give some of that up in my opinion. The less you can pay for the warranty, the better – particularly if you are financing the car where you’ll effectively wind up paying interest on the policy and depending on the loan term you might be paying it off after the policy coverage actually expires.
IMPORTANT CAVEAT – I live in New Zealand, a country with relatively generous consumer protection law. Therefore, issues like the breakdown that left me stranded (requiring the brake sensor replacement) and the check engine light that came on on the day I collected the car were repaired at the dealer’s cost because they were legally required to do – no reasonable consumer would expect even an old VW Touareg to leave you stranded within three months of purchase from a car dealer, and certainly not throwing a CEL on the way home! Depending on your local law, you might not have the same level of protection and this can drastically alter the “value dynamic” of an extended warranty. You MUST do your own research and understand what protections (if any) apply on a statutory basis depending on where you live. Do not go into the car buying process without being armed with this knowledge.