Extended Warranties- are they worth it?

I never buy the extended warrantees but my wife will get sucked in if I'm not around. She bought a VW JSW in 2010 and part of the purchase was a tire and wheel warranty. Supposedly (salesman told her) it covered replacement of damaged tires and wheels. She hit a pothole or something and bent one of the wheels. In the next week the bent wheel took out a wheel bearing. When I called the warranty holder I was told they would not warranty the wheel because the fine print says the tire must not be able to hold air. WTF... after some back and forth over the next week, I finally got them to reimburse me for half. At that point the warranty was a wash.

I rarely buy new bikes so this isn't a problem for me but on the ones I have bought,,,, no extended warranty.

Never even had the option of getting a warranty with any of my bikes, but I think part of it comes down to whether or not you work on them yourself. If you're not too handy, it might not be a bad idea. If you can do the work yourself, I wouldn't bother. Saves you the hassle of having to deal with the stealership as well.

extended warrantys are for idiots who have no concept of probability

ever play craps? the field and big 6 and big 8 are sucker bets. the same numbers can be bet elsewhere on the table at far better odds. yet people still make the sucker bets. and guess which bets the dealers are touting the loudest.
yo yo get your field bets down.
gotta have an extended warranty.

see the similarity?

how extended warranties work in a nutshell...

businessman thinks "what can i do that will consistently pretty much guarantee me a specific profit margin...say maybe 40%? hmmm...i could open a casino--very predictable profit stream in those--but there's a lot of red tape and mobsters to deal with there, so no... i could start an insurance company--another very predictable profit stream...nah, too much government interference with those. hmmmm, hmmm...i know! i'll sell extended warranties."

let's see...20% of XYZ motorcycles need warranty-class repairs after the warranty expires. the average total lifetime cost of those repairs (for the bikes that do need them) is $1,000.

so, if i sell extended warranties to 100 XYZ motorcycle owners, i will end up spending $20,000 in repairs. to make a 40% profit margin on that, i need to bring in a total of $28,000. if i sell 100 of them, i need to charge $280 each.

so, i will sell extended warranties at a cost of $280 each.

there ends up being three groups of people:

1. the businessman. he is pretty much guaranteed to make out in the deal as long as he can sell enough extended warranties so that he experiences the statistical norm. you are not him.

2. 20 (out of the sample 100) XYZ owners who get, on average, $1,000 back in return for the $280 they spend. these people clearly make out on the deal (at least on average). there is a 20% chance you will be one of these people.

3. 80 (out of the sample 100) XYZ owners who get $0 back in return for the $280. these people clearly get hosed in the deal. there is an 80% chance you will be one of these people.

should you, as an individual XYZ owner, buy an extended warranty or not?

one rational way to make that decision is to calculate the expected value of buying the extended warranty. if it is positive, then you should buy it. if it is negative, then you should not.

if you buy it, you have a 100% chance of spending $280, and a 20% chance of getting back $1,000. thus, the expected value of buying it is:

100% * (-$280) + 20% * $1,000 = -$80

thus, the expected value of buying the extended warranty is negative $80. buying the extended warranty is, from a probabilistic standpoint, the same as flushing $80 down the toilet. that is usually a pretty stupid thing to do...

but, that is not the whole story. for example, if you need your XYZ motorcycle to get to work, the cost of it breaking down could be far more than the $1,000 to fix it if you do not actually have that $1,000 and, thus, cannot fix it. you could, for example, lose your job because you cannot get to work...which would obviously cost more than $1,000. (and flushing $80 down the toilet to guarantee you will be able to get to your job might be well worth it.)

so, whether or not it makes sense to buy any given extended warranty depends on your personal utility curves and ramifications to you beyond just the cost of repairs. (it never makes sense if only looking at the expected costs of repairs.)

however, over the course of your whole life, buying them routinely will not work out unless you are a very rare statistical anomaly.

from a rational decision making standpoint (meaning decision making based on math and maximizing expected utility, not based on emotion), buying extended warranties is stupid in most cases. doing it routinely will almost certainly cost you money over the course of your whole life relative to just footing the repair bills yourself as they come up. if that were not the case, you would not be able to buy extended warranties because there would be no profit in selling them.

but, there are cases where, due to your personal situation/utility curve, the rational choice is to buy one even though the inherent expected value is negative...because your situation makes the expected utility positive even with the inherent negative expected value (e.g., the utility of keeping your job is so much greater than the utility of $80 that the probabilities are outweighed).

in those cases, you are not just buying the repairs which may or may not ever be needed, but also something else--perhaps the guaranteed ability to retain your job, to continue visiting a relative, to continue enjoying weekend joy rides, etc...

Never bought one.
Never needed one.
Never a regret.
Never want one.

As someone else stated, "warrantee" is not a good term for these products. They are quite simply "repair insurance".

Not dissimilar to homeowner's insurance or auto insurance.

The insurance company is betting on the probability that you won't have a claim, you're betting on the probability that you will.

little red toyota.
great explanation,and 100% spot on. including the fact that they may make sense for a small minority.

My wife has complained about every vehicle we've ever owned. Apparently the only vehicle that would make her happy would be the size of a Smartcar, seat nine people, be all wheel drive, get 50MPG, never break down or need to be serviced, and cost less than $1000. When I got tired of the complaining about her previous vehicle I bought her a new Highlander with an extended warranty. My thought process was that I was trading a big burst of upfront complaining about the price for years of no complaining about maintenance costs. From that perspective, $1K for four years of peace was a bargain .

Sounds like you found yourself a winner...

I'm usually against paying for any warranty. Should be included. However when I bought my KLR new in 2009, the dealer said I could have it out the door for $4,500. I said no. He said he would include the extended warranty. I said OK I'll take it.

I never did use the warranty for anything and had already planned to do all work myself. But, since he offered I wasn't turning it down.

That's the only time i've ever got an extended warranty

The average rider around here rides ~2k miles a year at sunny sundays.

I do ride maybe 12k miles a year, every day as long as the streets are free from snow and ice. That includes salted roads, hundreds and hundreds of miles of rain, every day two times 23 miles to/from work (means a huge part is cold running short distances), regularily speeds of 150mph and in the summer some turns in 1st/2nd gear full throttle at temperatures of 30+°C until fuel empty.

Considering this kind of use, I thought it a good idea to buy for my 16k€ bike a 300€/2years extended warranty (standard warranty 3 years).

what's going to happen to your bike isn't going to be covered by any warranty. suggest instead the best collision insurance available with a low deducible.

In this case, it makes a lot of sense. I'm waiting until the last week of my factory warranty, and if I do get to the 12,000+ mark, it's very likely that I will since I bought the bike in June and have nearly 6000 miles on it. Then I will see what kind of deal I can get from my dealer on an extension, if it's the same $2000.00 I will forgo this and and never buy another bike from that shop.

My concern is that the two bikes I was looking at, a Ducati Multistrada and
BMW K1600GT, seem to beg for an extended warranty. I've narrowed my search to the BMW, and since I prefer to buy used, remaining warranty plays a role as to what I'm willing to pay.
I'd hate to be stuck with a repair for that puppy without a warranty.

David

that would be factored into the price of "extended warranties" (really, "repair insurance" as someone else pointed out above) on those bikes, though.

purely from an expected value/cost standpoint, you will be better off not getting the extended warranty (otherwise the people who sell the warranty would not make money selling them, so they would not sell them and you could not buy one).

if your thought process is...

"the extended warranty costs $X. i'm reasonably worried about a repair bill of $Y. i can afford $X, but cannot afford $Y. having my bike be down for awhile because i could not afford $Y would be devastating to me. i would gladly flush $X down the toilet to guarantee that won't happen."

...then buy the extended warranty.

if your thought process is...

"I'm going to make out on this deal because the extended warranty only costs $X while a major repair would cost $Y."

...do NOT buy the extended warranty (because the $X * 100% will be greater in absolute value than $Y * the probability of needing the repair and, thus, buying the extended warranty will have a negative expected value for you--and a positive expected value for the seller which is why he is willing to sell it to you for $X).

one more thing. extended warranty sold by private company s are less then worthless. if the company shuts down (which they do,lots) your warranty is useless. also no shop is under any obligation to make the repair for what the warranty company will pay.
if the extended warranty is backed by the manufacturer and the dealerships it has some staying power.
I run a repair shop and have seen a lot of this. the contracts are usually full of loopholes and exceptions. i.e pistons and crank covered but not gaskets. looks good unless you know pistons and crank failure is very rare. gaskets we do every day.

yeah...that's a whole other concern.

in my comments, i'm assuming the extended warranty is actually a good warranty. as farmerstu has pointed out, though, many of the 3rd party ones are not.

It is much like insurance. They're betting you won't break, you're hoping you don't break, but want to be covered if you do. A majority of the time they win the bet, but then so do you if you don't have the bike break.

I will say I have used one on a car big time.

Make sure you check out the company underwriting the contract. Make sure it is a national company with a good track record. You don't want to buy a deal that is only honored at one shop or worse yet backed by someone that is going to fight every claim.

When I was selling we had a good company for them. If we felt the claim was reasonably justified we'd honor it. They want records of maintenance even if you do your own work. So keep the records to cover your butt, even if a bit fudged.

So you decide if you need it.

I'll always have one on my motorcycles. Bought a 7-year ESP with tire & wheel coverage when I bought my Ultra. I average about 30,000 miles a year, so the bike will be covered until just after I pass 200,000 miles. I can guarantee you that something will break between now and then. On top of that, between all the crud on the roads, and when I venture off-road, I'm bound to lose a tire at least once a year. If nothing else, it'll pay for itself in tires.

Forgot to mention: I was talking about a Honda extended warranty, never had in mind one could by it from a third party.

Me thinks a blown engine/gear box WILL be covered by the warranty. Exhaust broken because of rust I'm not so sure.
Collision with animals and theft was insured the first three seasons, didn't pay out and after that time it's no longer worth it for me (re-sale/re-buy value versus insurance costs).