Extended Warrenty on a Car?

Question: I signed up for an extended warranty for my car. It has 75,000, the warranty costs $3000 and will cover me for 60,000 more miles. I asked my mechanic about it and he said he didn't think it was a good idea but told me to bring it in so he could see it. After he read it, he said it was a good warranty and should help me keep my car for another 60,000 miles. He also said he worked with the company before and they were reputable. He's not at all connected to this company. Am I stupid to do this? Lynda, Minneapolis, MN

Answer: You are definitely not stupid. Now, I'm with your mechanic when it comes to extended warranties: The insurance policy is usually not worth it. In many cases, you can do better on your own. One strategy is to put the money you'd pay in premiums aside as part of your overall savings, and then draw on your that pot of money for repairs. Another is to include car repairs as part of your overall financial plan. As a general rule, there are a lot of truly bad extended warranty plans out in the market that line the pocket of the seller and cost the buyer a bundle.

However, "usually" is not the same as "always." You've done what I always recommend with extended warranties. Do your research. Check out the policy terms. Make sure you're working with a reputable firm. Get some expert advice if you can. You've done all those things by tapping into your mechanic's expertise. Also, how reliable is your car and what is the track record of the make and model as it ages? We all know that some cars are highly reliable and others seem to start falling apart not long after the manufacturer's factory warranty expires.

Thinking through whether or not an extended warranty is worth it is like evaluating any other insurance policy. Will having the extended warranty give you peace of mind? How fragile is your budget to a major car repair? Is the actual policy both understandable and favorable to you? In other words, does the extended warranty do what you think it should do?

In most cases, the answers come out on the negative side of the personal finance equation. But in your case, going with your trusted mechanic, it looks like you bought yourself some peace of mind.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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