Using a Personal Escrow Account Instead of Buying an Automobile Extended Warranty

by Hank

My wife and I face an expensive decision in a few months.  We must decide if buying the extended warranty for our car is worth the cost.  The bare minimum extended warranty to cover oil changes and normal yearly services will cost over $2,000.  We did the math and talked it over, and we are not going to buy the warranty.  We are going to use a personal escrow account instead to save for our future car repairs.

Most people are familiar with escrow accounts when they purchase a home.  Usually, your property tax and insurance premiums are wrapped up into your mortgage payments.  When you pay your mortgage, your mortgage company sets aside a portion of your payment in an escrow account for your yearly tax and insurance bills.  Instead of getting a huge bill all at once during the year, you essentially pay a twelfth of the payment every month to the escrow account.  So, if your yearly property tax bill is $1,000, then you mortgage company will set aside $83 per month in an escrow account.

You can set up your own personal escrow accounts at your bank much the same way.  Now, with automatic payments and transfers through online banking, you can easily set up a reoccurring transfer to fund a personal escrow account (savings account) nicknamed “Car Maintenance”.  For example, my wife and I will be receiving a moving allowance this winter from my work.  It will be almost the same amount of money as the extended warranty would have cost us.  So, we will just deposit it into a separate bank account just for automobile expenses. 

It is estimated that you will spend an average of $100 per month per car on maintenance.  That’s a great rule of thumb, and a safe bet is to save that $100 per month for car repairs.  My wife has driven a Jeep for two years now, and the SUV has had about $1,000 of repairs over that time.  We are doing slightly better than average, but since I have been saving $100 a month for car repairs, we did not have to pay for the new axle and other repairs with a credit card.

Consumer Reports calls extended warranties a sucker’s bet.  Extended warranties are an insurance policy, and companies do not get rich paying out insurance claims.  Most consumers do not even use half the cash value of their warranties.  Extended warranties are a waste of money, and you would be better off self insuring your car maintenance costs with a personal escrow account.  You can also check out this posting on a cost benefit analysis of why automobile extended warranties are not worth their cost.

So, keep building your personal escrow account a little bit every month in order to mitigate the chance that large bills like car repair will devastate your monthly budget.  You can also use personal escrow accounts to smooth out your budget for any yearly or quarterly purchase such as insurance, gym memberships, magazine subscriptions, association dues, club memberships, etc.

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{ 2 comments… read them below or add one }

Jerry October 10, 2008 at 4:10 pm

This is a great point, and I could not agree more. An extended warranty is nothing more than a glorified insurance policy, and there are much better ways to manage the possibility of repair costs – as well as the frustration that it leads to…
Jerry

Mrs. Accountability October 11, 2008 at 8:54 pm

We bought an extended warranty for my 1996 Nissan Pathfinder when we bought it back in 2002. We never used it, we never had reason to. If I’m understanding correctly, you own this car, you know how you’ve treated it, and if you have kept up with the routine maintenance. Had I known that the previous owner of my vehicle took it in to the dealer and had regular routine maintenance done throughout the life of the vehicle I would not have purchased the extended warranty. After I’d owned the vehicle for a few months, I discovered in the glove box that the owner had left some paperwork which showed the dealer he’d gone to for maintenance. I called the dealer, and I was amazed that they faxed me eight pages of detailed work they had done on the vehicle – scheduled maintenance repairs. However, I should say that the $1000 we paid for 18,000 miles or 18 months did give me peace of mind when we were buying it.

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