Extended warranties protect drivers from expensive repairs caused by mechanical failures or workmanship flaws. Since plans often save drivers from costly repairs, many ask the question, “How can an extended warranty business make a profit?”
You aren’t alone in wondering how a simple monthly payment on your car warranty can cover costly repair bills. After reviewing the industry’s best extended car warranty businesses, we can confidently explain how an extended car warranty business can make a profit.
Extended Warranty Business Model
Most extended warranty companies make money by charging a monthly premium worth at least two times the amount of likely mechanical problems or repairs. While this might seem unfair to drivers, it comes through careful calculation of the risks of coverage. Some cars may need few repairs, but extended auto warranty companies also end up paying repair bills for some troubled vehicles.
Actuaries who calculate extended warranty pricing might determine risks by:
- Gathering information on common mechanical problems, breakdowns, and failures
- Analyzing data on the most common complaints for certain vehicles
- Researching the market rate for extended warranty services
Companies then base their warranty coverage plans on this information and charge accordingly. The pricing of coverage plans has to be strategic – it cannot be high enough for consumers to turn away, but it must be sufficient to pay out claims and establish a strong bottom line. Other methods that extended warranty companies may use to make a profit include:
- Sourcing parts and labor for lower-than-market prices
- Generating more sales than claims that must be paid out
How Profitable Are Extended Warranties?
Extended warranty businesses tend to be more profitable than your average insurance company since they aren’t regulated by state insurance commissioners. While insurers can only sell an insurance policy for so much money, extended warranty companies can charge whatever customers will pay.
How an extended warranty business can make a profit is by charging a large enough amount to cover all car repairs with money left over. That’s why extended car warranty plans typically cost between $1,000 and $3,000 each.
Car dealers consider extended warranties to be highly profitable. The average dealer can make up to half of the selling price of an extended warranty, which is why you’ll often find a salesperson at the dealership heavily promoting plans to potential customers.
How Does An Extended Warranty Work?
Also known as vehicle service contracts, extended warranty plans cover certain repairs for a specific period of time or mileage. The warranty period covers breakdowns that arise due to mechanical failures or workmanship flaws.
If your vehicle experiences a problem, you can take it to a repair facility or a dealership to have it inspected. The amount of coverage you receive depends on the level of protection you choose, so read your contract’s fine print. The most common levels of coverage are:
- Bumper-to-bumper warranty: A bumper-to-bumper warranty is the most comprehensive coverage level, typically covering most parts of your vehicle.
- Powertrain warranty: A powertrain warranty covers only the major parts of your vehicle, such as the engine, drivetrain, and transmission. Powertrain repairs are very expensive, so this vehicle protection plan may save you considerable money.
What Are The Benefits Of An Extended Warranty?
Extended warranties can give you peace of mind about your vehicle’s protection while you’re on the road. You’ll also find that a warranty offers a variety of additional products and services, such as towing, rental car reimbursement, and roadside assistance.
With a used or certified pre-owned (CPO) vehicle, you may increase your resale value by investing in an extended warranty. Many service plans are transferable, so potential buyers may find value in your car if it has a vehicle protection plan.
Should You Get An Extended Car Warranty?
An extended warranty can reduce the financial stress of dealing with unexpected expenses for car repairs. It may be best to consider buying an extended warranty if your factory warranty is about to expire and you’d like to extend coverage.
While a third-party extended warranty business can make a profit off of coverage plans, drivers gain a sense of security from them and save money too. With a third-party warranty, you’ll gain flexibility in where your car can be taken for repairs, as most automakers’ extended warranties limit you to only their dealerships. You also tend to have more coverage options when you opt for a third-party extended warranty.
Top Recommendations For Extended Car Warranties
We’ve extensively researched the best extended auto warranty providers, and the chart below looks at each company’s scores in categories such as coverage options and the cost of the warranty. Endurance has the best overall rating, but Olive holds the best score for average cost.
|Warranty Provider||Overall Rating||Cost Rating||Coverage Levels||Our Award|
|CARCHEX||4.4||4.3||5||Best for Used Cars|
|Olive||4.2||4.6||3||Best Online Warranty|
|Protect My Car||4.3||4.1||3||Best Maintenance Benefits|
Endurance: Best Coverage
Endurance is regarded as one of the nation’s largest and most reputable providers of vehicle service contracts. The company is a direct provider of vehicle protection plans, so it handles all claims directly without dealing with middlemen.
Endurance warranty reviews show that there are plans for a variety of vehicles and budgets, with the Secure plan being the most affordable and Supreme being the top level of protection. The cost of an Endurance warranty depends on your vehicle type and the level of protection you choose, so get a free quote to find your rate.
CarShield: Best Value
Since 2005, CarShield has been a best buy among consumers for its inexpensive rates and relatively strong customer service. The company offers drivers several levels of affordable coverage for both new cars and used cars. CarShield reviews show that drivers like its month-to-month plans, which offer flexibility in their terms of coverage.
CarShield offers six extended warranty plans that range from exclusionary coverage to a basic powertrain plan. There are also warranty options tailored to high-tech parts and specialty vehicles like RVs and motorcycles. If you have a high-mileage vehicle, a CarShield warranty plan covers up to 200,000 miles per car.
CARCHEX: Best for Used Cars
CARCHEX has stood as an industry leader for over 20 years and holds a solid A+ rating and accreditation from the Better Business Bureau (BBB). The company has also been endorsed by industry leaders such as Kelley Blue Book, Edmunds, and CARFAX.
Of the five CARCHEX plans, one is specifically designed for older cars with high mileage. These excellent options show why CARCHEX reviews call it the best extended warranty choice if you want to protect a used car.
Olive: Best Online Warranty
As a newer company, Olive provides affordable extended car warranty plans that are taken care of entirely online. The provider receives excellent industry ratings and many positive Olive car warranty reviews.
The three Olive warranty plans are some of the most affordable in the industry and save drivers hassle through their online presence. If you’re looking for a forward-thinking extended warranty provider, consider Olive.
Protect My Car: Best Maintenance Benefits
Protect My Car is a popular choice among car owners who want strong maintenance coverage along with mechanical breakdown protection. The company offers three levels of coverage that range from basic driveline protection to comprehensive coverage that’s comparable to a manufacturer’s warranty.
Protect My Car’s Ambassador Maintenance Plans cover almost any vehicle and include free oil changes and tire rotations and heavily discounted mechanical repairs. Protect My Car reviews often mention the rewards program, which offers savings at retailers across the country.