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Company Representative for Becks Imports LLC
418 Posts
Discussion Starter #1 (Edited)

This question comes up a lot, and is important to think about as you consider buying an extended warranrty, from me or anyone else.

Let's say a one year extended warranty costs $2000. Logic would tell you that a two year plan should then cost $4000. It's twice as long, so should cost twice as much.

Advanced logic (advanced logic, I haz it) would tell you that a two year plan should probably cost more like $4500, because in that second year, the car is older with more miles, so the odds of something going wrong are higher than in the first year.


The biggest driver of costs in the extended warranty business is fraud, or the risk thereof. Just like there are warranty companies that rip off consumers, there are consumers that rip off warranty companies. Someone has a problem, THEN buys a warranty, limps the car along for a bit, then files a huge claim.

To protect against this, the warranty companies front-load the risk pricing into the warranty cost. Meaning, a short-term plan is always significantly more expensive, on a cost-per-year basis, than a longer term plan.

So if we use our example of a one year warranty at $2000, the reality is that a two year plan will be more like $2800. Because once they get past pricing that first year (or two), they figure you are not a fraud risk and would have gotten that out of the way, so the rates drop dramatically for the follow-on years.

Why is that important to know?

Because you should purchase, assuming it's within your budget, a warranty that lasts one year longer than you plan to keep the car.

What can happen if you buy a plan that lasts one year longer than you plan to keep the car?

1. You'll be paying a lower cost-per-year - That's the only way to look at warranty prices. Sure, when you see a big number like $5500 for a warranty, it sucks. But if that's for a five year warranty, that's only $1100 per year for full coverage on an M-car. What are the odds that an M-car will do $1100 per year in average claims with a full coverage warranty? HAHAHAHAHAHAHA, c'mon, you know the answer. Odds are high, especially in years 4 and 5, when the car is oldest, it's likely you will exceed that number.

2. You may wind up keeping the car longer than you thought - Job changes, life changes, you love the car, etc. Who knows? But if you do, for whatever reason, you do not have to freak out and drive it uncovered for that extra year.

3. You sell the car private party - This is where it really works well. You can see from many of the quotes I send out that the 'extra' year might be $800-$1000 more. So let's say you buy a 5 year plan when you wanted to keep the car for 4 years. The fourth year comes up and you decide to sell the car. Now you have this one year warranty remainder to use as a selling tool that cost you $800-$1000. If you list your car as 'At asking price I will include a one year full warranty", you just saved yourself $2000-$2500 in haggling the price on your car. Or if you decide to offer the warranty to the buyer of your car, and tell them it's $2000 if they want a full coverage one year warranty, you just doubled your money on that last year. What are the odds that four years from now, when your car has 30K-40K more miles on it, a buyer of your car can get a one year full coverage warranty for $2000? HAHAHAHAHA, you're kidding, right? It's the best (and likely only) deal they'll ever get!


Becks Imports LLC
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