For the most part, car buyers have wised up to the fact that extended warranties are usually a waste of money. This is bad news for the dealers selling the extras, so many of them are changing their vocabulary. Don’t be fooled, though: most finance products are rarely worth the cost.
A recent report from Automotive News cited a CDK Global study that examined the language that dealers use to sell add-ons in the finance office. The study concluded that millennials tend not to be as receptive when the word “warranty” is used.
Good for you, millennials! You finally are starting to catch onto this whole smart car buying concept. Of course, the study states that those darn millennials think differently when a “service contract” is offered to them without realizing that usually an “extended warranty” and a “vehicle service contract” often mean the same exact thing.
So what exactly is a vehicle service contract and do you really need one?
The Federal Trade Commission has a great breakdown on vehicle service contracts (aka extended warranties) that clearly lays out what they do and do not cover and whether or not a dealer can obligate you to purchase one.
A service contract is a promise to perform (or pay for) certain repairs or services. Sometimes called an “extended warranty,” a service contract is not a warranty as defined by federal law. A service contract may be arranged at any time and always costs extra; a warranty comes with a new car and is included in the purchase price. Used cars also may come with some type of warranty coverage.
Basically, a vehicle service contract may cover you for parts and labor on certain components after the factory warranty on a vehicle has expired. If you followed the adventures of our old friend Doug DeMuro and his CarMax Range Rover, you will see that sometimes these investments can pay off, especially in the case of vehicles that are well beyond the factory warranty term and are notoriously unreliable.
But most buyers aren’t purchasing 10-year-old Range Rovers, and the CDK study is focusing on millennials who are buying brand new cars, the vast majority of which are very reliable and don’t need such warranty extensions.
Furthermore, other data has indicated that millennial buyers tend not to keep their cars very long and either trade them frequently or prefer leasing. These are the types of buyers who will only own the car within the factory warranty period and therefore would typically not have a need for additional coverage.
In an old but still relevant study, Consumer Reports found that “55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was just over $1,200. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.”
No matter what the dealer says about “protecting your investment” (it’s not an investment) the statistics on purchasing extended warranties or “vehicle service plans” rarely work out in your favor.