Extended warranty for Jeep, good or bad?

November 11, 2020 8:30 AM

Just purchased a 2020 keep grand cherokee, and added on their extended 7 yr bumper to bumper plus gap insurance ($4000 total for 7 yr loan warranty, and 800 for gap). Was this a good idea? Know there's more information probably needed, but it's through Fidelity Warranty services. Purchased vehicle on Monday, so I think I have through tomorrow to try to cancel, and I'm reading reviews of it not being with it? Anyone with experience?
posted by MamaBee223 to Sports, Hobbies, & Recreation (6 answers total)

As with a lot of questions about insurance, the answers is determined more by your individual circumstance rather than by the insurance you buy. Insurance in general acts to cover risks that you can't otherwise afford to cover. Gap covers the risk that you total your car while the car is worth less than your loan amount. Extended warranties cover the the risk that you have expensive car maintenance when the car is out of warranty. How big of a risk are those to you?

If you had a massive car collision that wrecked your car just a couple months after you bought the car, and you had to pay your bank (say) $5000 to cover the difference between the market value and your loan amount, what would you do? If you would not be able to pay it, not be able to buy a new car, be unable to get to your work, be subsequently fired, and no longer be able to pay your rent/mortgage, then you should probably have gap insurance. If that's the case, you probably shouldn't buy brand new Jeeps. If you would shrug, cut a $5000 check, go buy a new Jeep, and move on with your life, you probably shouldn't have gap insurance. A same question applies for the maintenance - what would happen to you if, say, three years after you buy the car, the engine explodes, requiring a $5000 engine replacement? Insurance covers those risks, but insurance does so at a net profit to the insurance company - they will always charge you more than they expect to pay you back in order for them to have a profit. Insurance is always an expected financial loss for you, but if it's the only alternative to avoiding significant pain to you, it's worth doing.

As for your specific questions...

Extended gap is almost definitely not worth it - if your loan term is so long that you need gap insurance for more than one or two years, you're overextending yourself financially. In addition, gap insurance is quite expensive for the return. It only reimburses you for the "gap" between open market value and the loan amount. That gap will decrease pretty rapidly after you buy the car. After three to five years, even with long loan terms, the gap should be zero, and hence the gap insurance is worthless after that time. This isn't to say gap insurance is worthless (see above), but extended gap insurance is particularly worthless.

Extended warranties are something that you should probably buy outside the dealership if you decide you need one. Warranties are, in general, returnable, so you should look into your warranty to see if you can get it refunded by your dealership. Dealerships will add significant markup to the warranty and dealerships use them as a massive profit center. You can buy extended warranties outside the dealership for significant discounts compared to a dealership.

At the risk of repeating myself, paying $4000 for the warranty implies that Fidelity has strong financial models suggesting you will likely incur (much) less than $4000 in repair costs over the four years the extended warranty covers (after the three year Jeep warranty). They put a lot of effort into validating those models, and they have a lot more data than you do. If you think you can cover $1000/year in car repairs without significant burden, then you should consider not getting the extended warranty. Of course, it's also possible (but unlikely) your repairs are much more than that, so you should consider what you would do in the hypothetical engine-exploding case.
posted by saeculorum at 8:45 AM on November 11, 2020 [5 favorites]

Best answer: Former quality engineer here (ag vehicle business). I always refuse to buy extended warranties, on absolutely everything. The reason is The Bathtub Curve. Products are most likely to fail either early in the life cycle, due to defects in materials or assembly, or late in the life cycle, due to fatigue and general wear. The standard manufacturer's warranty is there to protect the product during the high failure early stage of the life cycle. The extended warranty exists to cover the product beyond this early stage, at the point where the likelihood of failure is lower and steadily declining, and the manufacturer knows this. Selling these extended warranties is like printing money for them.

I'd suggest just taking that $4,800 and setting it aside to cover any repairs you may need.
posted by TrialByMedia at 10:23 AM on November 11, 2020 [4 favorites]

Best answer: That is an expensive extended warranty. 4 years of coverage is $1000 per year in covered repairs (i.e, outside of "wear" parts like brakes and standard maintenance like oil changes). Plus there could be a deductible on top of that. I personally would not buy a vehicle that I thought was going to require repairs to that extent so early in its life. The only advantage I see is the ability to finance the warranty and pay it off over more years, which may be worth it if you have income now and expect to have less at the time you're making the repairs. If it were a no deductible manufacturer extended warranty it would be a bit more sensible because of the peace of mind. Unless you have very high anxiety and very low future cash flow, I'd try to get a refund. The couple of times I did buy an extended warranty they cut the price in half when I negotiated.
posted by wnissen at 10:28 AM on November 11, 2020 [2 favorites]

My theory is that they wouldn't offer this product, if they weren't making money on it.
posted by starfish at 3:36 PM on November 11, 2020 [1 favorite]

Third party warranties aren't typically a great deal in either the financial sense or the sense of the benefits/ease of use. I suspect that you could get an extended warranty from the manufacturer that works just like the new car warranty itself and is much, much cheaper if you check around on some Jeep-specific forums.

10 years ago, I got a Toyota warranty extension to 5 years/120k miles for about $1000 from an unrelated dealer in New Hampshire on a barely in-warranty used car. The third party warranty the dealer we got the car from wanted to sell us was about three times the price. That markup is why they only sold the third party warranty. IIRC, the 7 year version was under $2000. They even offered a 12 month interest free payment plan.

In that case, it worked out financially since we had to get a couple of wheel bearings replaced and some other stuff I can't remember right now and it was more convenient since it covered work at any Toyota dealer and included no-charge rentals while the car was in the shop.
posted by wierdo at 7:18 PM on November 11, 2020

Just like anything, the insurance business is a business that knows what it is doing. So if you are paying X for insurance, you know full well that the insurance company is, in the aggregate, paying out some percentage well under 100% in claims. On other words, your insurance payment covers not only repairs, but it puts food on the tables of insurance employees and deepens the swimming pool of money of the owners.

So, in the aggregate insurance is never a good economical choice. But we don't live in the aggregate and so have to take things like peace of mind into account. My compromise is that if the thing I am considering insuring is something I could cover if I had to, like a $1000 car repair or any electronic replacement, I don't get the insurance involved. If its not, like my house burning down, then I do.
posted by rtimmel at 9:32 AM on November 12, 2020