Extended Warranties: Some Are Worth It, Most Are Worthless

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At a casino, the odds are always with the house. When it comes to extended service contracts and extended warranties, the same rule applies, but the sellers win with different bets -- that you'll never use them, overpay for them, or fail to understand what's covered.

Warranties can cost you plenty, and extended warranties have plenty of fine print. You need to read them before you sign, and do the math to determine what the chances are that one will pay off for you. The odds are already stacked further against you if you don't.

And you may have more rights than you realize to make a manufacturer or retailer address an issue. The Federal Trade Commission offers guidelines on extended service contracts.

Auto Extended Warranties

Consumer Reports characterizes extended auto service warranties mostly as dealers' last-ditch effort to get more of your money. They're an expensive gamble for you, and sheer profit for them. Even if you do have to get a repair, that contract enures you'll come back to the dealership.

A 2013 survey of 12,000 Consumer Reports subscribers found of those who purchased extended auto warranties, a staggering 55 percent never used them. Those who did spent a median of $375 more overall compared to those who paid out of pocket for repairs.

Popular Mechanics, on the other hand, sees some value in extended warranties -- with notable caveats. In an article forthrightly headlined How to Get a Used-Car Warranty and Not Get Screwed, it cautions that a warranty on a certified pre-owned car is likely to be useless, since the car has been vetted and found to be in good shape. But for luxury cars and hybrids that can be expensive to repair, Popular Mechanics in most cases advises getting a warranty -- even for cars that are certified pre-owned.

Both publications point out that buying a reliable model is the best insurance against costly repairs down the road. Both also caution against buying an extended warranty from a phone or mail solicitation as these are frequently scams.

Home Warranties

With the joys of homeownership invariably come problems -- especially with houses that are, as some say, of a certain age.

The home warranty I had with my last house pretty much paid for itself. A friend had even better results with her warranty. Her dryer went bust, and she made money on the replacement with a manufacturer's rebate.

But there are many reasons against them. With a newer home, a builder's warranty should cover many repair issues, just as a manufacturer's warranty does for appliances or cars. In many instances, homeowners insurance will cover damage from accidents. Home warranty companies top the most-complained-about list on Angie's List (ANGI) year after year, but the site attributes this to consumers assuming something is covered that isn't, and then being surprised by the service charges that are standard to most home warranties.

That said, if your house is under 10 years old, both Consumer Reports and Consumers Checkbook instead recommend setting aside a household repair fund in an interest-bearing account.

Tech and Appliances

If you're buying tech gadgets or appliances, you will be invariably be pressured to buy the extended warranty. Don't, Consumer Reports counsels. Electronics rarely need repair during the extended warranty period.

Purchases made with with certain credit cards get extended coverage. American Express (AXP) is cited by The New York Times (NYT) as the best card for extended warranty protection. USA Today recommends third-party electronics warranty companies like Square Trade as an alternative to in-store warranties.

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Extended Warranties: Some Are Worth It, Most Are Worthless
When you get into that back office and start signing all the paperwork, the topic of extended warranties will come up pretty quickly. Ellie Kay, an author of 15 finance-related books, notes that such warranties are negotiable.

"Before you sign on the dotted line, check out other sources of extended warranty pricing," she says, such as those provided by your bank or insurance company. "Then either use this lower price in the financial and insurance office for negotiation to get them to match the price, or buy it from the other source."

A scenario from Kay during her last car purchase: "The dealer quoted me $4,200 for a three-year extended warranty for my 280SLK Roadster Mercedes that included a $250 deductible. USAA -- my insurance company -- gave me a three-year warranty for $3,200 with zero deductible. I've used the new warranty once already. The bill was $1,100 and I paid nothing because of the zero deductible."

Bottom line: The default extended warranty is almost always the worst deal.
You may have a monthly payment figure in your head when shopping for a new car, but your interests are better served when you focus on the out-the-door price instead.

"A sales rep can often trick you by offering a lower monthly payment, but [one that] will stretch out the terms of the loan," says David Bakke, a car buying expert at MoneyCrashers.com.

You can reduce the overall cost of the car via negotiation and by skipping accessories and add-ons. "Things like navigation systems, rims, floor mats or car audio/entertainment systems can be purchased from a third party vendor, usually for less."

All our experts agree: Don't even mention your preferred or maximum monthly payment price.
If you decide to trade in your current vehicle for another, Kay says to negotiate this apart from the price of the new car and only after you've negotiated everything else. You can learn the full value of your car by going to Edmunds.com or kbb.com. Once you know what the car is worth, don't settle for anything less. Kay also advises you to seriously consider selling your old car yourself, and applying what you get toward the principle of your loan.
It may be tempting to just head to one local dealership, take a test drive or two, and walk out the door with a new car, but you'll save yourself a lot more money by doing a little pre-shopping research.

"Once you have your choices narrowed down to a few makes or models, contact the Internet sales manager of a few dealerships," suggests Bakke. "These folks can often offer better pricing than what you'd find dealing with an on-site sales person. Plus, you save time."

In addition to, or in lieu of, e-shopping, Joshua Duvall of Capital Financial Services says to "find a few vehicles from different manufacturers and pit them against one another." He explains that the car buying market is based on quantity and the fact that dealers want to move cars. "Force them to compete for your business."
"Dealerships often employ hard-sell tactics that can be overwhelming for a first-time buyer, so it is a good idea to go with someone who has been through the process before," explains John Ganotis, founder of CreditCardInsider.com.

Granotis also says that if you're buying a used vehicle, it's wise bring along a friend who knows his or her stuff when it comes to car health. For example, a mechanic who can peek under the hood, or recognize if something subtle is wrong during the test drive, would be especially handy.
You've likely heard it before, but we have to repeat this fact: Buying a used car is almost always a better value compared to buying new. If you like a particular model, buy the same car, but a year or several years older. Unless there have been major body changes, you'll hardly be able to tell the difference.

OK, so sometimes ol' Sally breaks down, and you need to get a new set of wheels, stat. If you don't fall into that category, though, our experts recommend choosing your purchase date strategically, such as during a major sale. Better yet, wait for the end of a promotion.

Dealership salespeople often receive a bonus if they meet their targets during a promotion. Even if they lose money on a vehicle at the end of a promotion, they typically make up for the loss with their promotion target bonus.

Erin Konrad of CouponPal suggests buying near the end of the month. This is when salespeople are trying to meet monthly quotas and are more likely to negotiate.

Be familiar with common strategies employed by dealerships and sellers. For example, MSN Money warns against the "four-square" trick. (I've had this one used on me.) In this trick, the salesperson draws four boxes with a number in each: your old car's trade-in value, the new car's price, the down payment, and your monthly payment. "From there, the salesperson begins crunching numbers -- most likely making it too hard for you to follow," writes MSN. He or she will shift your focus to the monthly payment, which can result in a longer loan and a higher interest rate.

Another common trick is to heighten your sense of urgency, says Business Insider via Gregg Fidan, founder of RealCarTips.com and the author of "Honest Guide to Buying a Car." For example, the dealer may tell you "that color is not available; there's only three left statewide; the price is good only for today; someone else is interested in the car, better decide quickly, etc." In this case, be patient and courteous, but remain level-headed and never rush to buy. Study up on Fidan's list of 112 car-buying scams.

To sum up the list: Don't let yourself get too caught up in the excitement of shiny metal, and remember that in six months that "new car excitement" will have faded, and you'll be due for an oil change.
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