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An extended warranty sounds like a good thing to have when you buy a new car (which you shouldn't do unless you're rich and can take the hit on depreciation). But it's best to stay away.
Why, you may ask? Well, the worst thing about an extended warranty is that it is overpriced. In fact, about half of what you pay goes to the salesperson's commission. So a lot of the money you hand over doesn't even go toward the purpose of the warranty, which is to pay for things that go wrong with the car over the contract period.
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A Simple Solution
The smart move to make would be to set aside half of what you would pay for the warranty, and use that money to handle any car repairs that might come up. Not only is this more efficient, but you won't be out of luck if the service company goes bankrupt (which has happened).
For the dealer, it is more important than ever to sell an extended warranty when they sell a car. The National Auto Dealers Association says that the average car dealer is losing money on the sale of each new car, so tacking on the warranty is crucial for them to make money.
Unfortunately, more people are buying it. Ten years ago, according to the NADA, 23.5% of people who bought a new car bought extended warranty plans. That figure has risen to 34.4% in the first half of this year.
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Recently, Consumer Reports surveyed 8,000 of its readers about warranties and discovered that 65% of them spent significantly more for the new car warranty than they got back in repair savings. That means, with no debt and an emergency fund, you can afford to fix what goes wrong with your vehicle without buying this rip-off.