I recently bought a new car and got the hard sell in the dealer’s office to buy the extended warranty plan. In spite of giving me the hard sell on how great and reliable the vehicle was, they kicked in the “you never know what could happen” argument into the discussion on the extended warranty. I bought a Nissan Murano by the way and chose not to buy the extended warranty. Let’s look at the specifics.
The basic Murano warranty is 3-year / 36,000 miles. This is a pretty horrendous warranty in my mind. I can’t profess to be an expert on average warranties, but this seems like it is on the low-end. They wanted to sell me an additional 3-years and 36,000 miles for $1,750. I was told this was “only” $250 more than their actual “cost” and was the same deal employees received. In typical sleazy dealer fashion, I also got the “please don’t tell your friends I’m doing this for you because I can’t give this deal to many people” pitch. Apparently after talking with me for less than hour and selling me a car for a few thousand dollars under the MSRP, they felt we had developed such a great relationship that I should get the friends & family special on the warranty.
Getting back to the math. Under the current warranty, I’m covered for three years. So, right off the bat, I’m paying today for a service three years in the future. For three years Nissan would have access to my funds to invest however they please. This is fantastic deal for Nissan. If you doubt the value of float, take a read through Warren Buffett’s latest Chairmen’s Letter. Or simply look at his current Net Worth.
The main argument I heard was I could need a new air conditioner or something similar and that could cost $3,000! Let’s just say for argument that this replacement would take place four years from the date of purchase. Assuming I had kept the $1,750 and earned 5% in a CD over the next four years, I would have approximately $2,125. I believe the correct way to evaluate these warranties is looking at expected value, or in this case, expected cost. Assuming under the warranty my cost would be zero, the breakeven probability of repair for me is just over 70%. That means, unless I have believe there is a greater than 70% chance I will need this costly a repair, I’m better off passing on the warranty. I didn’t believe my chances were that high, so I decided to keep my money, although I did transfer $1,750 to a separate account for car repairs just to see how I personally turned out on this singular decision.
Warranties like this are pushed on consumers constantly, from electronics purchases to cell phones. I never buy the warranty because I feel I’m always overpaying for the actual probability of needing to use the warranty. Ask yourself, why do the sales people push the warranties so hard? It’s because it’s enormously profitable for companies.
On a singular purchase, you can win or lose with a specific warranty, but overall I believe you’ll spend less money if you universally turn down extended warranties and pay for the problems you actually have. Add up all the warranties you did buy or could have bought for TVs, refrigerators, washers/dryers, cars, computers, etc, etc. That’s a lot of money.
After writing this piece and thinking through the issue some more, I’ve come up with a new policy for my own finances. Every time I buy something with a warranty, I’m going to turn it down, then go home and transfer the cost of the warranty into a separate “warranty” account. I’m highly confident that account will grow overtime.
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