People find a significant amount of peace of mind from having someone else foot the bill with unexpected out-of-pocket expenses. Think about it. You might have AppleCare on your iMac to cover a screen going out, an American Home Shield warranty to cover an HVAC system on the fritz, or a road hazard warranty on that set of tires from Discount Tire. It feels great when an \”emergency\” is no longer considered an \”emergency\” because you know someone else will pick up the bill.
Unexpected vehicle repairs are no different as people are tempted by a warranty or insurance policy to protect them when their vehicle has a large repair bill. Doing so protects you against the risk of the repair cost exceeding the policy premium. So who is genuinely left footing the bill? My argument would be you and I.
Have a Plan
As you may have experienced with other products, not all warranties are created the same, nor do they necessarily cover what may seem obvious. This is no different in the auto industry. So before stepping into that dealership showroom to purchase a new vehicle, you should have your research done and be able to make a solid decision based on the information you\’ve gathered. At least we all hope to be that prepared.
However, we get enticed by add-ons, warranties, and additional coverages.
If you step in with a plan, it will help curb the enthusiasm of adding another cost to that new car and prevent the high-pressure sales manager from making another easy sale.
If you are planning to keep your car for just a few years, most manufacturers have at least a 3yr/36k bumper-to-bumper or basic warranty and a 4yr/50k warranty for the powertrain. Ford, Jeep, Subaru, Toyota, to name some, all have at least that basic warranty.
Typically these extended warranties are added to the back-end of your standard manufacturer warranty. So be mindful of how many years you usually keep your vehicle, the amount of mileage you put on the vehicle, and whether the warranty would expire due to the time or the mileage. Determining these things will then help you assess your risk.
Often, we have unfounded fears that don\’t come from facts, and unfortunately, insurance companies directly feed on these fears.
Building Up and Modifying Your Plan To Spend
When building up and modifying your Plan to Spend, one key component to look at is vehicle maintenance. To prevent fear or even reverse it, having a vehicle maintenance line item will allow you to have a place to allocate savings to cover normal maintenance outside of an initial maintenance plan. This fund will cover things like an O2 sensor, a battery, a timing belt, a brake repair, or another type of component replacement.
An extended warranty does not typically cover normal maintenance, so you need to plan for these things whether you have the warranty or not. You will find that by doing so, you will accumulate resources to cover more extensive maintenance or repair items by saving and planning. If you budget to maintain your vehicle, you will find that you will seemingly have fewer emergencies. You may not even consider them an emergency anymore because you have the funds to take care of whatever arises.
Vehicle Seasonality
Beyond removing the fear around significant component failures, take a serious look at the vehicle\’s seasonality and determine how long you plan on having it. If it has a basic bumper-to-bumper warranty and then a powertrain warranty, you may find that you only keep a vehicle for an average of 5-years. Most manufacturers cover powertrain components for that long.
The average miles driven per year is somewhere between 12k-18k per year. You will want to figure out how many you typically drive, and the time you plan to keep it. For example, if you keep your car for 5-years and only put an average of 10k miles per year on the vehicle, you can expect to replace that vehicle before a powertrain warranty expires.
In this case, correctly maintaining your vehicle should protect against many mechanical failures.
The existence of a factory warranty, proper maintenance, a maintenance savings account, and replacing the vehicle before the warranty expires would make an extended warranty completely impractical.
Suppose this is not a practical solution to allow for your fear to subside. In that case, you may want to consider taking the average cost of a vehicle\’s extended warranty, taking out a larger loan for that amount, and depositing it into a money market account. If the money goes unused, you could take that cash out and apply it to your loan balance.
A side-effect of building margin into life is to allow these decisions to be easier, so you don\’t let fear drive your decision-making and do not consider the unintended consequences.
Hypothetically speaking, if you were to spend $2,500.00 for your extended warranty, assuming the average loan term of 72 months at the average interest rate of 5.5%, you would be paying an additional $41.00 per month for the extended warranty. This amount would equate to almost $3k by the end of your loan, assuming you didn\’t sell the vehicle. This total leaves out any fees that the warranty may have to maintain and any deductibles for utilizing it.
What If I Already Purchased a Warranty?
If you have already purchased a warranty and never used it, don\’t fear. Look at how you may be able to cancel this policy and get the prorated amount returned to you.
If you are looking for a vehicle and are still nervous about not having the extended warranty, remember that you can add it later. Don\’t allow the high pressure to push you to make a decision that may not be wise. Try getting a slightly higher loan or setting aside the amount for that extended warranty otherwise, and see if you need a portion of it along the way.
This amount may just act as an additional means of forced savings that are out of sight and out of mind.
Call To Action
Take a look at whether you have ever bought an extended warranty and if you have, call the originator to see what the prorated cancellation of this product would be. You may be able to take this and put it directly into your maintenance fund within your Plan to Spend.
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