Germaine and Pete Peterson bought two cars in 1985 and purchased extended warranties for both.
They never used the $380 contract covering their Toyota Celica, but the $600 Oldsmobile warranty paid off when the air-conditioner compressor went out, saving them a $700 repair bill.When the couple bought a Ford Explorer 15 months ago they decided to drive it for a while before deciding on an extended warranty. The cost would have been $678 for five-year or 60,000-mile coverage, but the Petersons passed.
"We felt the car was coming up well in Consumer Reports on frequency of repair, it was not a vehicle that has a lot of equipment on it, and we thought if anything went wrong, my husband could repair it,' " says Mrs. Peterson, who is a financial adviser and teaches courses on how to buy used cars.
Extended warranties provide repayment on repair bills for autos, appliances and items such as televisions and stereos. The contracts have proliferated in recent years, mainly, experts say, because they are so profitable for the auto dealers, consumer electronics stores and other merchants who sell them.
"It's a gamble - you're betting you're going to need it and they're betting you're not going to need it. That's where they make a profit," says Barry Woody of the Tennessee Consumer Protection Division.
"They're not cost-effective for everyone. It's what you're comfortable with," says Martin Silver, manager of the American Automobile Association car-buying service. "It can't completely be boiled down to dollars and cents."
An extended warranty is like an insurance policy. "It covers something that, while it's not likely to happen, it may happen and may cause you serious financial problems," says Bill Bacon, owner of Auto Merit, a firm that inspects used cars for prospective buyers.
Generally, though, extended warranties are not a good buy, says Mrs. Peterson.
Woody believes it is often best to take the money you would spend on the warranty and put it in the bank to earn interest.
With cars, problems happen either early in a car's life, when it is covered by the manufacturer's warranty, or when it reaches 80,000 to 90,000 miles, past the period when most extended warranties would cover repairs, Mrs. Peterson says.
And manufacturers' warranties are getting better, adds Silver. Three years or 36,000 miles is common, and some automakers have offered seven-year, 70,000-mile warranties.
The warranties also don't normally cover routine maintenance, and most have $50 deductibles, meaning that if a repair is covered, you still have to pay the first $50 of the bill.
Nonetheless, there are reasons for looking into buying an extended warranty for your car.
It can be peace of mind for you, for one thing.
And, as William McGuire, assistant editor of Consumer Reports, says, a consumer who buys a car despite its poor reliability record or a new model without a repair record may find an extended warranty worth looking at "if he can get it at a reasonable price."
To McGuire, reasonable is $300 for a contract that will extend the manufacturer's warranty on a medium-priced car by at least two years.
They may also limit risk for someone who buys a used car, said Bacon. Used-car warranties run from six months to three years and 40,000 miles and cost $250 to $1,000.