Warranties are not free. They increase your base car payment typically by about $1 per day in most cases. The average person can afford to set aside $1 each day and not have a negative impact on their finances or their daily lives.
However, it is much more difficult for the average person to come up with $500, $1,000, or $2000+ on the spot.
A warranty allows you to lock in your budget by protecting you against unexpected repairs and costs. It makes your car payment predictable and almost fixed instead of variable at any given time. It is much easier to know what your payment is and to budget for it than to budget for something unexpected like a car repair.
Let’s look at a couple examples.
Let’s say that your base car payment is $400 monthly (your base car payment is simply the payment on the car with no warranties, insurances, or add ons). With a warranty it would be $430 monthly.
Here’s what your budget could look like when an unexpected repair pops up:
Which scenario looks better to you?
You can see how in November the payment more than doubles because of the unexpected repair when there is no warranty in place. However, with the warranty the payment remains at a steady $430 per month. This is much easier and more attainable to budget for.
This may seem like a simple, obvious concept but it helps to visualize it to really see the impact a warranty can have.
Let’s look at the same scenario but with a small twist.
This time, instead of paying the cost of the repair in cash let’s pretend that we have to put it on a credit card because we don’t have the full amount required up front.
While we can’t afford the $600 up front, we can afford $200 extra per month. We will put the repair on the credit card and then pay our extra $200 per month until the repair is paid off on the credit card.
In this example you can see how the warranty kept the monthly payment at a steady $430. With no warranty we had 3 months of $600 payments because of the repair. Not only that, but we also would have paid some interest on the repair because it was a balance on the credit card.
Another way a warranty can keep your payment down is by locking in your repair costs in today’s dollars. This means that you know what your payment is today, and are protected against the risk of rising prices in parts or labor that may happen in the future. A repair that costs $2,000 today may cost $2,500 in a couple year’s time.
In the next post in our warranty series we explain how to calculate how much warranty you would need if you decided to protect your next car with an extended warranty plan.