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Monday, December 04, 2023

Buyer Beware Warranties for Sale!

If you own or lease a vehicle, someone has probably tried to sell you a warranty, maybe several people or companies. You may have already bought one, but you probably haven’t had to use it, or maybe you didn’t even realize you were sold one. If you have tried to use a warranty you purchased, it probably didn’t cover the repair your car needed.

Over the past decade, the quality and reliability of most vehicles have improved more than at any time in automotive history. If you did your homework and bought a quality car, you simply don’t need to buy another warranty, aka extended service contract.

I understand that some people buy extended warranties on their vehicles because it gives them “peace of mind.” If you’re one of them, I urge you to carefully study the warranty being offered for what it does and does not cover. The warranty companies, as you would expect, are very well versed in what repairs are more or less likely for every make, model, and year vehicle for which they sell an extended warranty. They write the warranties to cover those items that are least likely to fail and less expensive to repair if they do. They exclude items that fail more frequently and are costly to fix. For example, a powertrain warranty is often offered for free by car dealers but is also often sold.

The powertrain consists of all the parts that are lubricated by oil or grease on a vehicle. The condition in a powertrain warranty (and all warranties) is that your vehicle must have all the manufacturer’s recommended maintenance performed, which means all oil changes (typically once every year or 10,000 miles for most vehicles). Historically, to the best of my knowledge, no vehicle has ever required a repair that had all its oil changes as recommended by the manufacturer.

The huge increase in the reliability of vehicles in the past decade is largely due to the commensurate increase in technology and engineering, particularly in software and computers. Today’s automobile is more a computer on wheels than the mechanical device that evolved from Henry Ford’s Model A. Most extended warranties sold today cover mostly mechanical parts like the engine, transmission, and axles, but cover very little of the computer modules and software. These computer components are extremely expensive. The irony is that the mechanical parts fail very seldom now because of the computerized parts.

The reason extended warranties are pushed on you today is simply because they’re extremely profitable for the sellers. Almost all large car dealers design and sell their own extended warranties. They decide what the warranty covers and does not. They also decide the price. The profit margin on these homemade warranties is HUGE, some approaching 100% or higher. This is partly because tax laws favor insurance companies. Warren Buffett, close to the richest person on Earth, made most of his money owning insurance companies. Insurance companies don’t have to pay income tax on the premiums they collect from you until they “earn out”. If you buy an auto, extended 5-year warranty for $2,000, the company pays no income tax in the first year and just 20% of the tax per year after. This is called “the float” and is why warranty companies make more money than any other. They take all the money that you pay them in untaxed premiums and invest it, which increases their profits by their investment return.

**Earl Stewart**

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