Monday, December 03, 2007

Should I buy an extended warrantee?

December 2007 - So we bought a new car. Because we have an expanding family we decided to purchase a mid-size SUV. There are a number of offerings, but for safety, reliability, warrantee, size and cost, we felt the Hyundai Santa Fe was the best option.

Notice that I said warrantee in the sentence above. Hyundai comes with a standard 100,000 mile "powertrain" and 60,000 mile "bumber-to-bumber" warrantee. From what I found, most car companies offer much less than Hyundai. Typically something like 50,000 mile powertrain and 36,000 bumper-to-bumper. I found Hyundai's offering to be very nice as if something happens with the transmission on mile 99,999 I don't have to worry about it.

I wrote about my experience in Denny Hecker Finance a few weeks ago. During our taped conversation, the finance manager tried to sell me an extended warrantee. That is, bumper-to-bumper coverage for over 60,000 miles or powertrain coverage for over 100,000 miles. To be honest, I can't remember the exact details. They're immaterial though.

Extended warrantees are nothing more than insurance. While some insurance (e.g. health) is good, some (e.g. legal) is bad. If you'd like to rid yourself of all risk, then you might want to buy an extended warrantee. That way if something ever goes wrong, you can drop it off and it's fixed. On the other hand, if you're comfortable with some risk, they are a rip-off. And I mean rip-off! Let me explain.

To calculate the price of an extended warrantee all you need to do is take the probability of something happening (P) multiplied by the cost (C) of fixing that something. For example, if you think there is a 10% chance that your axel will fall off during mile 100,001 and the cost of fixing that axel is $2,000, then the cost is $200 (i.e. P(C) or 10% * $2,000).

Now I hate to break it to you, but you're not getting an extended warrantee for that kind of money. I don't know what the exact costs are, but I think mine was something like $1,000. I figure there is a 10% chance of something major happing to my car after warrantee, so it would take a $10,000 repair bill to make the extended warrantee worth it. Thus, it's a rip-off for me.

In addition, the car dealership will want to finance the extended warrantee for you. As they say "it will only raise your monthly payment a few dollars." Isn't it sad how we value things by our "monthly payment?" Anyway, extended warrantees are bad, financing them is worse!

So here you have it. If you'd like to rid yourself of all risk, buy an extended warrantee. On the other hand, if you're comfortable with a bit of risk in your life (and you should be), then skip the extended warrantee like we did. Just make sure you don't bring up the "probability" discussion I described above. It has a propensity to confuse finance managers.