QUESTION: Scott on Twitter asks if Dave is a fan of warranties on cars and products. Dave tells Scott he never buys warranties.
ANSWER: No. I’m not. As a matter of fact, I would tell you to never do that. I turned down an extended warranty this week.
We have to look at the cost of goods sold. That’s my cost to produce a widget called a warranty. If I’m in business, I also have overhead because I have to pay secretaries, people to process the claims on these warranties, rent a building, and so I have to add money to that cost to cover my overhead. Hypothetically, I want to make a profit, so I need to add that on there, and I’m probably going to have to get someone to sell this warranty. As much as 50ndash;80% o the price of the warranty—epending on the warranty company—goes to commissions back to the dealer. So I have to pay a commission, and that’s in my cost. If you add all of that up, now you have the price—divided by 1,000 or whatever—of the warranty. It’s what “we”—as a warranty company—charged you for it.
Really, all you’re getting coverage for is the actual statistical probability of the breakdown, but you’re paying for overhead profit and marketing in addition to that. Were you to save the money and you have an average automobile that breaks down an average number of times, you’re going to come out way ahead financially. If it breaks down more than average, then you won’t. But if it breaks down more than on average, then the warranty company goes broke. In other words, they know they’re not going to have to pay out all the money they take in on warranties. Hello! That’s how they make a living.
Never buy extended warranties.
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