Here in New Zealand, there are three issues of national significance that everybody must have a strong position on:
1. Whether or not pineapple belongs on pizza
2. Whether the South Island or the North Island is better
3. Whether it’s worth buying an extended warranty (also known as ‘mechanical breakdown insurance’/MBI) on a used car
This last point is particularly contentious.
For reference (for readers outside of “Kiwiland”) New Zealand is a country with relatively strong consumer protection laws.
For example, I can go and buy an iPad and not bother with taking out Apple’s rip-off AppleCare extended warranty. Why? Because although Apple only offers a 12 month warranty, our Consumer Guarantees Act recognises that no reasonable consumer would expect a brand new, high end electronic device to only last 12 months.
I know that New Zealand isn’t the only country with this kind of legislation, but equally not every country has this type of law.
It also applies to cars.
If you buy a car from a registered motor vehicle dealer, you are covered by the CGA. The extent to which you are covered by the CGA depends on what car you have purchased, how much you paid, how old it is, how many miles it has covered etc – but the protection is sufficiently robust that most experts in New Zealand (e.g. ‘Consumer’ magazine) posit that aftermarket warranties/MBI policies are generally a bad deal and should be avoided.
HiHowever, I’ve got an old first generation VW Touareg upon which I took out an extended warranty when I bought the car. There’s about six months left on the warranty, and as I mentioned in a recent article the car has developed a fault that – without the warranty – would probably be a death sentence for my ownership of the vehicle (I’m not going to spend 50% of car’s value on a repair).
I think the warranty policy cost me about $1500, and it will pay out close to double that when the repair is complete, so I’ve done alright there.
On the other hand, I’ve had cars in the past where I’ve opted for an extended warranty and it has never paid out a cent – because either the repairs that were required were under the excess threshold, or nothing really went wrong.
What I wanted to do in this article is just give some general thoughts on whether or not buying an extended warranty is worth it. The “value proposition” of such a purchase is going to vary massively depending on where you live, what sort of car you’re buying, what the warranty terms are etc.
That being said, I feel there are some general “for and against” points that can be made:
Circumstances Where You Should Buy An Extended Warranty (Or At Least Consider It)
- You can’t afford for the car to go wrong – Automotive extended warranties are fundamentally insurance policies. I take out insurance on my house because I can’t afford to buy a new house if my current one burns down. With insurance, the trade off is basically paying some money now to mitigate the risk of having to pay out a whole load more money if the worst comes to pass. In effect, you are paying now for more certainty tomorrow. If you have the financial wherewithal to pay for the odd repair on a car you’re about to buy, then you might be better off skipping the warranty. However, if a $1500 repair on your $10,000 car would see you facing a financial black hole, then maybe the warranty is the better option. Ultimately, the value proposition here is going to vary hugely depending on your personal financial circumstances (I am not a financial advisor, and nothing in this article is meant to be financial advice).
- You are buying a car with the potential for big repair bills – This is why I took out the extended warranty on the Touareg. Ultimately, it’s a once-expensive, heavily-depreciated luxury car that has a propensity for going wrong in a costly manner. This is the sort of car that is probably worth having a warranty on. By contrast, if I was buying a late model Toyota Corolla with impeccable service records and in mint condition, then I probably wouldn’t bother with the warranty.
- You live somewhere with poor consumer protection laws – I can’t comment on the specifics without knowing where you live, but in some jurisdictions there is little in the way of protection for a used car buyer. You might get a short dealer warranty or something like that, but once that has expired you are on your own. In this scenario, it’s more understandable that you would consider buying an extended warranty on your purchase.
Where You Shouldn’t Bother
- The warranty terms are poor – This is critical to check prior to paying for any warranty. Some aftermarket warranties are good, but many – frankly – suck. Some policies have a laundry list of exclusions (particularly on cars that are more likely to go wrong) and/or very low payout limits or high excesses. There can be other fishhooks too, like the policy not paying for consumables during a repair – on some vehicles the likes of ATF for a transmission repair can run into the hundreds of dollars. For example, most of the warranty providers in New Zealand won’t pay out more than about $4000-5000 on a repair for a European car. Depending on what goes wrong, you could blow past that figure. If you are considering an extended warranty then you MUST thoroughly check the terms and conditions of the policy to ensure that you are getting an amenable deal and that you are aware of any excesses and limits.
- The warranty is a large percentage of the car’s value – This is often not an issue anyway, because most warranty companies will only place policies on cars of a certain value (because anything under that value is probably going to be junk and therefore likely to need repair) however, if the cost of the policy is a substantial part of the total purchase price, then you should think about whether you are better to simply purchase a superior car without a warranty. For example, instead of a $5000 car with a $1500 warranty, could you get a much better car for $6500? As dealerships are typically where you get an extended warranty, could you do even better by buying a private sale vehicle for similar money? What you lose in terms of security from the warranty you may gain in terms of security from a superior car.
- You’re covered by existing consumer protection laws – Just like deciding whether or not a warranty is financially worth it, only you can decide if your local consumer laws are robust enough to give you sufficient protection. However, if you feel you are sufficiently well-protected, then there isn’t much point in parting with unnecessary sums of cash.
- You are handy with cars and are buying something you can fix yourself – Many older cars are quite fixable. Even the Touareg is a repairable car (in most circumstances) if you know what you are doing and have the right tools. If you are good at repairing cars, then any extra warranty cost is probably better spent on purchasing parts and/or tools if you find yourself in the situation of needing them.
What is your take on buying an extended warranty for a used car?
Have you purchased a warranty and regretted it? (I also took one out – as I got a sharp price – on my wife’s Subaru Legacy. We have never made a claim over three years, and the extra cost of the warranty could have gone towards maintenance or a PS5 or something like that).
Have you not purchased a warranty and regretted it? For example, you’ve purchased a car that wound up detonating itself, leaving you facing a big repair bill.
Any and all commentary on the subject of used car warranties is welcomed in the comment section below – fire away.
