Managing the Financial Side of Commercial Fleets

When an Extended Warranty Makes Sense...and When it Doesn't

To determine whether an extended warranty is right for your fleet, review vehicle usage, lifecycles, and replacement policies.

January 2013, by Sean Lyden - Also by this author

Extended warranties operate much like an insurance policy, reducing a fleet’s risk exposure to unexpected catastrophic, big-ticket repairs beyond the original manufacturer’s standard warranty. But, with a cost ranging from several hundred to more than $1,000 per vehicle, when do extended warranties make good financial sense for fleets? When are they a waste of money?

New, Unproven Vehicle Technologies

Extended warranties make sense when getting into new technologies, such as hybrid, all-electric, or technology that has unknown repair costs, according to Tony Piscopo, director of fleet management services at ARI, a Mount Laurel, N.J.-based fleet management firm.

“With a more traditional fleet or a fleet that uses proven technology, you can estimate what the cost will be to maintain those vehicles, and budget accordingly,” Piscopo added. “But, with newer technologies, I would really consider an extended warranty.”

Smaller Fleets

Piscopo said most large fleets are able to “self-insure” by spreading the risk and cost of potential repairs across a larger pool of vehicles. For example, if the cost of the warranty is $500, a fleet manager could assign that money to each applicable vehicle, instead of buying the actual warranty. The more vehicles in the fleet, the more money set aside to cover repairs for individual vehicles.

“But, extended warranties make sense for smaller fleets when a fleet manager doesn’t have enough vehicle volume to bank that risk,” Piscopo said. “For example, for a fleet that has fewer than 25 units, if one vehicle blows an engine, that expense could throw the entire budget upside down. Fleet managers with more than 25 units may want to consider self-insuring, but smaller fleets may not want to take that risk.”

Mark Lange, CAFM, maintenance services specialist with GE Capital Fleet Services, agreed. “The smaller the fleet, the more likely you’ll be interested in having some type of extended warranty to avoid the risk of a major powertrain repair. With a larger fleet, it’s possible to spread the expense over a larger number of vehicles. Also, the larger fleets don’t typically keep vehicles as long. They’re probably cycling them out at 60,000-75,000 miles. So, there really isn’t going to be that same benefit as a smaller fleet, which might keep the vehicle for five years and maybe 100,000-150,000 miles.”

Lifecycle Considerations

“If you purchase/finance the vehicle and are planning to keep the vehicle longer than three years, buy the extended warranty,” said Andrew Smith, fleet specialist at 1-800-GOT-JUNK?, who advises the company’s 180 franchise owners on vehicle specification (for Isuzu NPR trucks), financing, and warranty options.

“Also, if you purchase or finance the vehicle and have a turnover policy of less than three years, purchasing an extended warranty has the potential to increase the vehicle’s resale value (depending on resell and whether the warranty is transferrable),” Smith added.

When should fleet managers decline an extended warranty? According to Smith: “If leasing a vehicle, an extended warranty is unnecessary, as vehicles are generally leased from one to three years — during which time the base warranty will likely still be in effect.”

Piscopo advised fleet managers to be realistic in relation to accurate vehicle cycling parameters. “Ask yourself, ‘What am I trying to get out of the extended warranty? Is it going to minimize my cost? Am I buying the appropriate duration and mileage required for my fleet?’ ” he said. “If you take an extended warranty and don’t use it, that money is not well spent.”

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