Extended warranties sound perfect. A simple service contract that at a minimal cost takes care of most pricy repair jobs for a long time. It looks too good to be true in some cases which may make people wonder, what is it that makes these contracts beneficial and more importantly profitable for the providers? What is the business model that supports this seemingly neat endeavor?

In this article, we will break down the economics of extended warranties. We will also talk about the basics of finding and purchasing an extended warranty which could save you from potentially devastating repair bills down the line.

What To Know About The Economics Of Extended Car Warranties

The probability of an extended warranty provider relies on careful market and customer analysis. Loosely explained, their business model is similar to an insurance company where they aim to take a fixed amount and if needed, provide coverage for a much higher amount in case of expensive repairs. But in case a claim is never made, the amount isn't refunded.

To set prices and claim settlement rates, actuaries collect and analyze customer data to find the most common set of repairs, average labor cost, etc. Based on this analysis, they decide how much they should payout. The settlement process is initiated with the help of vehicle service contract administrators, for easy and accurate resolution.

With global revenue of over $120 billion in 2019, the extended car warranty market is highly profitable which is why we have seen so many new entrants in the third-party warranty space. Despite the slowdown caused due to the COVID-19 pandemic, the industry for vehicle protection plans is expected to reach over $169 billion in the next seven years.

Do Car Dealers Make Money On Warranties?

Another common doubt that lurks in people's minds is "what's in it for the dealers"? Well the reason why most dealers urge you to purchase an extended warranty from them is that they get a commission per customer which can go as high as $1000. The commission rates are nearly 50%, which is why all manufacturers these days, doesn't matter if it’s a German luxury brand or an affordable Japanese automaker, they all will try their best to get you to buy an extended warranty when you buy a new car.

How Much Should An Extended Warranty Cost?

Extended Warranties come in all shapes and sizes and the pricing structure is equally widespread with basic coverage starting from under $1000 while a comprehensive plan, especially for luxury vehicles, can go upwards of $3000 and that of course excludes the deductibles charged on every visit. If you want to buy an extended warranty for your existing vehicle, the following factors play a key role in determining the price and coverage of your vehicle:

- Age

- Make

- Model

- Mileage

- Preexisting conditions

Do You Need An Extended Car Warranty?

Warranty coverage should always be seen as an added layer of security that can save your wallet from unexpected expenses but one always runs the risk of ever having to use it which could seem like a waste of money. It can come in handy if you don't want to spend money later or choose to purchase a vehicle that costs higher than usual to run and maintain. In cases of affordable and reliable cars, the warranties might not be as useful especially if you walk around with enough savings to cover occasional repair bills.

Before buying an extended warranty make sure you evaluate providers based on cost, coverage, and convenience. Also, don't forget to compare policies and negotiate to get the best possible deal. So whether you use your extended warranty or not, it does guarantee peace of mind.

Recommendations for Extended Car Warranty Companies

Uproar:

Uproar is based out of Seattle, Washington, but it’s not like any other extended car warranty company out there. Uproar bills itself as an innovator, which makes a lot of sense considering it’s the first extended warranty company to offer a 100-percent digital, subscription-based experience. The main highlights of uproar include an instant quote and signup online, same-day coverage, no long-term commitments, transparency, and no aggressive salespeople or robocalls. They are BBB accredited and have five-star ratings from both Google and Consumer Affairs.

Olive:

Olive is one of the newest players in the business, apart from extended warranty plans, it also offers mechanical breakdown insurance in California. It has also secured some of the best consumer ratings courtesy of its top-notch service and a wide range of plans that deliver timely resolution of claims.

- For cars up to 10 years old/ 140k miles

- 100% online extended warranty solution with customizable plans

- File claims online 24/7

- Affordable monthly payments

- Call for a quote & get a free $5 gift card

Endurance:

They offer Coverage for cars up to 20 years old which makes it ideal for used car owners. They offer hassle-free inspection after which the claim can be filed, making the entire process foolproof and they aim to ensure that you don't miss minor details which might cause you trouble in the future. They also offer membership benefits which add to the whole customer experience and help them secure the top spot.

- Coverage for cars up to 20 years old

- Cut repair costs with full protection for your vehicle

- Inspection is required before a claim can be filed

- Extra perks with all-inclusive membership

- Join & save $300 on a protection plan

CARCHEX

They offer coverage for cars with up to 250,000 miles which makes them a great choice for people who plan to purchase a warranty for their heavily used vehicles. They offer a wide range of policies some of which offer industry-leading claim filing processes. With an A+ rating from the Better Business Bureau, CARCHEX should be on your list when shopping for an extended warranty.

- Covers cars with up to 250k miles

- First-rate full-coverage protection for new and used vehicles

- The claim filing process depends on the policy

- No-haggle, low-price guarantee

- A+ rating from the Better Business Bureau

Are extended warranties a scam?

How do I calculate the cost of an extended warranty?

Should you buy an extended car warranty on a new or used car?



FAQ

Q: Are extended warranties a scam?

No, extended warranties work just like extended warranty plans provided by vehicle manufacturers and cover you from unexpected repairs. In fact, in most cases, they offer more flexibility and benefits making them the best option for people looking for an extended warranty after the expiration of their factory warranty.

Q: How do I calculate the cost of an extended warranty?

You can visit the company's website or call up your dealership to find the rates applicable for your vehicle.

Q: Should you buy an extended car warranty on a new or used car?

Yes, an extended warranty on a used car can prove to be highly beneficial and save you from expensive repairs in the long run. You can buy an extended warranty straight from the dealership for a new or a used car as long as your car is under a factory warranty. For cars that have surpassed the factory warranty period, you can always go for a third-party extended warranty.