When purchasing a new car, one of the most common offers you’ll hear at the dealership is an extended warranty. It usually sounds appealing—protection beyond the manufacturer’s coverage for unexpected repairs. But the real question is: is it worth the money, or just another sales trick?

What is an Extended Warranty?

An extended warranty, sometimes called a vehicle service contract, is a plan you buy to cover certain repairs and services after the manufacturer’s warranty expires. These warranties vary widely, with some covering only major parts like the engine, while others include electronics, air conditioning, or even roadside assistance.

Consumer Reports describes extended warranties as “cash cows” for their vendors because they bring in far more money than is ever paid out in claims.  According to Eric Evarts, associate autos editor at Consumer Reports, “Dealers and automakers sell extended warranties to make money. The consumer is only at a disadvantage with these things. They have to pay out less than they’re earning or they don’t make profits.”

The Federal Trade Commission put out this warning:  “Be alert to fast talkers. Telemarketers pitching auto warranties often use high-pressure tactics to hide their true motives…. If you buy a service contract, you may find that the company behind it won’t be in business long enough to fulfill its commitments.”

So, does it ever make sense to purchase one of these extended warranties?  Well, the simple answer is… No!

An extended warranty sounds like a good thing to have when you purchase that shiny new car, but it’s best to just say No!  One of the biggest problems with those extended warranties is that they are just too expensive.  About half of what you pay for the warranty goes to pay the salesperson’s commission.  For car dealers, it is more important to them, now more than ever, to sell you the extended warranty.  With profits at a minimum, not to mention a reduction in sales volume, the commissions they make on the sale of the extended warranties, goes a long way towards filling the lost revenue gap they are experiencing.

According to the NADA, ten years ago 23.5% of new car buyers purchased an extended warranty when they bought a new car.  That figure is up to over 34% in 2013.  A consumer’s Reports survey found that 65% of the 8000 people surveyed spent significantly more for the new car warranty than they got back in repair savings.

Rik Paul, automotive editor, Consumer Reports says that, “Extended warranties sell costly ‘peace of mind’ for repair nightmares that probably won’t occur,”  The Consumer Reports survey went on to say that “On average, buyers paid $1000 and got $700 back in the amount of money they saved in repair costs.”

Why Extended Warranties Might Be a Rip-Off

Extended warranties often sound like a smart safety net, but in reality, they can be more of a rip-off than a benefit. They usually come with a high upfront cost—often between $1,000 and $3,000—which many car owners may never actually use. On top of that, the coverage is often limited, excluding common “wear and tear” parts like brakes, tires, and batteries. Since new cars are generally reliable, the chances of facing major repair bills during the warranty period are quite low, and by the time issues arise, many people are already thinking of upgrading their vehicle. To make matters worse, the claims process can be frustrating and restrictive, with specific rules about where you can service your car.

So what’s the solution?

Consumer Reports recommends putting the money you would have spent on an extended warranty into a money market or mutual fund to insure against the unlikely event of big repair costs from parts failure.

Another alternative if you find yourself contemplating forking out the cash for that extended warranty, would be to set up your own “warranty”. Take at least half of the money you were going to pay for that extended warranty and put into a savings account.  Then each month, contribute a small amount to the saving account, it doesn’t have to be much, 25 or 50 bucks.  Keep doing this, all the while your “factory” warranty is in effect, and after it expires.  You will not only have the money available should a problem arise that your factory warranty doesn’t cover, but you will likely have a considerable amount of money saved up in your “warranty” account to make a significant down payment on a new car or take the family on a vacation!