Extended car warranties - don't be a pushover

Most people don't buy a new car without hearing the dealership finance manager warn about "how foolish it would be" not to protect your investment from unexpected repairs as you put on the miles. What comes next is a persistent sales pitch for a solution to your new fears: an extended warranty. "You could save the amount of the plan cost with just one covered repair!" says a brochure for Ford's Extended Service Plan.

But extended warranties sell costly "peace of mind" for repair nightmares that probably won't occur, according to a survey of more than 8,000 readers in December 2007 by the Consumer Reports National Research Center. We have long advised that extended warranties are a poor deal for almost every product. Now we have the first data showing that this advice applies to most new cars, as well.

To raise public awareness on the issue, Consumer Reports is launching a national advertising campaign this week targeting the car-buying public.

Sixty-five percent of the survey respondents said they spent significantly more for a new-car
warranty than they got back in repair cost savings. On average, dealers collected around $800 on each extended warranty they sold.

Respondents cited warranty costs of $1,000 on average that provided benefits of $700; an average $300 loss. Some 42 percent of extended warranties were not used, and only about a third of all respondents used their plan to cover a serious problem. About one in five respondents (22%) said they had a net savings.  Seventy-five percent did not buy extended warranties at all.

Extended warranties were, however, a better deal for those who bought more troublesome cars
scoring lower in Consumer Reports' reliability Ratings, such as those from Mercedes-Benz. Still, only 38 percent of Mercedes-Benz owners said they saved money. The average loss was $100. Lexus and Toyota owners lost the most money: $600 on average for Lexus and $550 for Toyota. Owners of Pontiacs and Jeeps broke even because on average they had covered repairs that equaled the warranty cost.

Our advice

• Don't feel pressured to buy an extended warranty at the same time as buying a new car. Instead, shop about six months before the vehicle's factory warranty runs out.
• Ask for and have a trusted mechanic review sample contracts before buying.
• Bargain hard, sales commissions can be large.

Read the complete report "Extended warranties: A high-priced gamble" to learn more about:

• How extended warranties work
• What the average by brand is for money lost
• Frequency of warranty use by brand
• Who should buy a warranty
• How to get a fair deal