2/28/2005

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

"Are online extended warranties a good idea?"

Dear Dave,

I’ve been trying to follow your advice, cut up my credit cards and get rid of my debt. I bought an extended warranty for my Ford F150 pickup truck. I compared a lot of warranties and a lot of companies were trying to bamboozle me, but I did find one company who promised to provide coverage similar to the original factory warranty. When I checked it out, the warranty looked pretty good.

I had to have my air conditioning repaired and the shop charged me $1,550. This warranty company really stepped up and covered me.

Now I’ve got a friend who has an older car and is looking at an extended warranty. I recommended this company, but would like to give him some key things to shop out on these warranties. What do you recommend?

Jerry in Phoenix, AZ



Dear Jerry,

I recommend he not buy one. Extended warranties are not a good deal! Extended warranties are insurance. Insurance is made up of four components: commissions, overhead expenses, the statistical probability of the event occurring and profit. When you buy an extended warranty, you’re covering commissions, overhead and profit. Thirteen percent of what you’re paying for an extended warranty goes toward actual repair costs. If you’d set that amount aside, you could cover that average repair expenditure on your vehicle. The remaining 87% of what you are paying is going toward the warranty company’s marketing costs (commissions and sales expenses) and profit. Extended warranties are extremely profitable for those selling them and a terrible deal for those buying them.

Fifteen hundred dollars for an air conditioning repair on a Ford pickup is a rip off. Self-insure with an emergency fund and choose your repair people better.

-Dave

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