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How To Calculate The Cost Of An Extended Warranty Sold By Dealerships

Wouldn't it be great if you knew what Dealerships paid for the Extended Warranties they sell....and what they charge for them.

Well, now you can.

It's really very simple.  Extended Car Warranty costs are calculated as a percentage of the price - regardless of who makes the car, van, truck or SUV you're considering.  Here's how this works.

Let's say you're looking at a new Truck and considering the most common extended warranty - 5 years and 100,000 miles of coverage.  The MSRP (the Sticker in the window) says $32,000.  The Manufacturer sells the Warranty to the Dealer for 2.3% - 3.5% of the MSRP.  So, for this particular truck, the warranty will cost the Dealer between $800 and $1,120.

The Dealer then adds his or her profit when selling it to you.

In most cases, they will sell the Warranty to you for 60% more than what they paid for it.

So, for this particular truck, the Dealer will sell the extended warranty for between $1,280 and $1,760....when it only costs them somewhere between $800 and $1,120.

Here's an easy formula for you to use to calculate the costs of a Dealers Extended Warranty:

- Total MSRP X 2.3% & Total MSRP X 3.5%.  Somewhere in between is the Dealer cost.
- Total MSRP X 4% & Total MSRP X 5.5%.  Somewhere in between is the what the Dealer will want you to pay.

Make sure you use this information when you're negotiating the price of a Manufacturers Extended Car Warranty.  It should save you a considerable amount of money.

What Extended Car Warranties You Should Consider.....And What Warranties You Should Avoid

I want you to be very, very careful when shopping for a car warranty.  There's a tremendous amount of garbage out there.  Internet Start-Ups are everywhere, consumers aren't getting their repairs paid for, and Dealers push really hard for you to purchase their products.

One question I get asked all the time is - What makes one extended warranty better than another? There's actually two reasons....

One, does it cover engine damage due to over-heating.  And two, do the repairs get paid for by the Warranty Company before you leave the repair facility.

Most extended warranties (even many manufacturers) don't cover over-heating and in my opinion don't qualify as a true extended warranty.  If the warranty you're considering will pay for damage associated with overheating, you're in pretty good hands.

And if you're considering an extended car warranty that requires you to pay for a major repair and then reimburses you at a later date....run for the hills.  You're just asking for trouble with these type of warranties.

You'll typically have 3 options when looking to purchase a warranty.  They are:

1. A Manufacturer's Extended Warranty sold by a Dealership
2. A Non-Manufacturer (Aftermarket) Extended Warranty sold by a Dealership
3. An Extended Warranty sold by an Insurance Company

With the Manufacturers Extended Warranty sold by Dealers, you're pretty safe.  You're vehicle gets repaired by Pros and the Warranty is solidly backed.

The only issues I have with these warranties is the way they are sold and whether or not they cover over-heating.  Dealers can essentially charge whatever they want, or....whatever they can get from an unsuspecting buyer.

Here's an example of what can happen - I recently spoke with a young lady in Florida that ended-up paying more than $4,600 for an extended car warranty....and she didn't even know it.

The Dealer had buried the amount they charged for it in the contracts and she never caught them doing it.  And since the Manufacturers don't police their Dealerships well, Dealers will continue to charge whatever they believe they can get.

Make sure you remember to read what's covered - over-heating has to be covered.  If it's not, pass on the Manufacturer's warranty.

A recent development regarding extended warranties are non-manufacturer warranty products, or aftermarket warranties, sold by Dealerships.  These products are usually offered by small companies which many times have limited financial resources to honor any warranty claims.

So, why would a Dealer push a warranty from an "aftermarket" company, you ask?  It's simple - Money.  Dealers can make a lot more money selling these warranties because the profit levels are significantly higher than those offered by the the Manufacturers.

If the Dealer is offering an extended car warranty from an outside company, make sure you pass on it.  If not, you're just asking for trouble.

A third option for extended coverage are warranties offered and backed by Insurance Companies.  They can be a solid option - but you have to be very selective and very careful with any choice you make.  Over the years, I've heard numerous horror stories about car owners spending tremendous amounts of money - only to have the Warranty Company deny a claim.

The first thing I recommend you do is check with your Car Insurance Company to see if they offer an extended warranty product.  If it meets your mileage and time needs (5 years - 100,000 miles for example), isn't to expensive, covers over-heating and pays for any repairs before you take your car home - think about purchasing it.  That warranty is usually going to be a good choice.

If your car insurance doesn't offer an extended warranty, there are perhaps 20 or so large companies that can help.  However, more than 75% of these companies have negative ratings or complaints on file with the Better Business Bureau.  Always check the BBB first to make sure you're dealing with a quality company.

One company I highly recommend is Warranty Direct & their new car extended warranty coverage.  They typically have the lowest-cost warranty coverage's available, and they:

- Let you use the Repair Facility of your choice
- Pay the Repair Facility before you leave
- Give you Free 24x7 Roadside Assistance
- Offer an EZ Pay Financing Plan
- Have been in business for more than 24 years (long before the Internet);
- Serve almost 2 million customers;
- Offer 5 different levels of extended warranty coverage to meet whatever needs you have
- Give a Money Back Guarantee
- Have a stellar record with the Better Business Bureau;
- Are a Forbes Top 200 Company.

They keep their promises, answer the phone when you call and pay for your repairs - while you're still at the shop!  Overall, Warranty Directs Extended Warranty Coverage is a very solid choice and a company worth taking a look at when you're looking at Extended Car Warranty options.

Should You Spend The Money On An Extended Car Warranty....Or Not?

Beside cost, the biggest concern most folks have about an extended warranty is - should they get one or not?  Well, I can't give you a definite answer.  Yet, I've come up with what I think is a fantastic (some say it's almost common sense) way to determine whether you should purchase an extended car warranty....or pass on it.

First, though, I want to pass along a couple of observations I've made over the years.  Data I've collected over the years shows that about 29% of all new car, van, truck and SUV buyers purchase an extended warranty.

Yet, 72% of all vehicles had a major (i.e. expensive) repair after the original factory warranty had run out.

What that means is.....there's a bunch of car owners out there that have to drop a large chunk-of-change to repair their car, truck, van or suv.  Some don't mind.  With other folks....it puts a serious dent in an already tight budget.

And here's something else I've noticed - Ever wonder why most Car Makers offer a Standard 3 or 4 year Warranty?  Because hundreds-and-hundreds of Accountants and Engineers have figured out that a 3 or 4 year lifespan on many critical components is a safe bet for them.  After that, it's a coin-toss.

But what about those Car Companies that offer a 10 year Warranty, you ask?

Well, I say read the fine print on the warranty.  What's really covered?  And just as important - these offers are nothing more than creative marketing gimmicks used to sell cars that very likely wouldn't sell very well without them.

Here's how my solution works - and for your convenience, I've broken this solution down into 8 separate scenarios that will apply to almost any individual or family circumstance.  See which scenario applies to you.

Should You Get An Extended Warranty....Or Pass On It?

Words Of Wisdom

When considering an extended car warranty, remember to take your time and review the Company and what is, and is not, covered by their warranty.  In particular, make sure over-heating is covered and repairs are paid for....before you take your car home.

We hope you enjoy your shopping experience and save some money with these tips and advice.

And do make sure you let us know what you end up doing - contact us at mynewcarpurchase.com.

Tom O'Leary is an Automotive Portfolio Analyst, Author and has been called a modern-day "Robin Hood" for his efforts in helping the Automotive Consumer.

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