SoFi

If you’re buying a new car or a used one, you will likely face the decision of whether or not to purchase an extended warranty.

An extended warranty typically covers the cost of certain repairs after the manufacturer’s standard warranty (which usually lasts three years or 36,000 miles, whichever comes first) expires.

These policies can help you breathe a little easier, knowing that if your vehicle needs a pricey repair in the future, some or all of the cost could be covered.

On the other hand, an extended warranty can be expensive in and of itself and usually don’t cover every possible repair. So it could wind up being a big expense that doesn’t really pay off.

In this guide to extended car warranties, you’ll learn about what these policies do, their pros and cons, and whether one might (or might not) make sense for you.

What is an Extended Car Warranty?

When buying a new car, it likely comes with a manufacturer’s warranty. An extended warranty is an optional plan you can buy to help you pay for the cost of certain repairs your vehicle may need while you own it, after that original warranty expires. You may be able to get an extended warranty when buying a new or used car (the latter may depend on whether the policy is transferable; more on that in a minute.)

•  Extended car warranties, also called extended service contracts, typically cover the price of major repairs or replacements (with exclusions) for a certain number of years or number of miles.

•  The extended warranty usually begins when the manufacturer’s warranty expires, but sometimes the two overlap.

•  While these plans are often offered at the point of sale, you can typically purchase them any time until the original manufacturer’s warranty expires.

•  Extended warranties are also offered by third-party vendors.

If you’re interested in getting an extended car warranty for a new or leased car, it can be worth going online to compare policies from independent providers to see exactly what each one covers, what’s excluded, and how much it costs. This can help you decide which warranty would work best for you and whether it is worth getting.

What Does an Extended Car Warranty Cover?

Just as you may wonder, “What does car insurance cover?” you may be curious to know, “What does an extended car warranty cover?” Exactly what the policy covers will vary with every provider and the type of warranty you choose.

The only way to know for sure is to carefully read the extended warranty policy agreement, but here are some general rules of thumb.

What It Covers

Extended warranties typically cover the major mechanical parts of your car, such as:

•  Engine

•  Transmission

•  Steering

•  Suspension

•  Clutch

•  Air-conditioning

•  Electrical systems, including in-car audio and navigation systems.

So if your engine blows or oil starts leaking, it will likely be covered. Coverage may not be 100%, however, and you may have to pay a deductible before coverage kicks in.

Some policies also offer add-ons like 24/7 roadside assistance, rental car reimbursement, trip interruption service, and tire protection.

What It Doesn’t Cover

Generally, extended warranties won’t cover routine maintenance or damage caused by normal wear and tear, such as:

•  Oil changes

•  Replacing the timing belt (unless it fails before the recommended replacement time)

•  New tires

•  New brakes

•  Windshield wipers.

If an item isn’t listed in the policy, you can assume it’s not covered.

How Much Does An Extended Car Warranty Cost?

Pricing will vary depending on the type of vehicle, what the plan covers, what the deductible is, and the length of the contract. The upfront cost of the warranty can range from $1,000 to $3,000 or more. If you’ve been saving up for a new car, that can be a significant additional expense.

If you purchase a car warranty from a dealer and include it in your financing, you are likely also going to pay interest, which will increase the total cost of the warranty.

You might have to pay a deductible every time you submit a claim, plus kick in money for a portion of the bill.

Pros and Cons of Extended Car Warranties

Whether you should get an extended car warranty or not is a personal decision. It will depend on how reliable the car is and, if you’re buying a used car, how old the car is. It will also depend on how well you would be able to manage if your car encountered a problem that will be costly to fix.

Here are some pros and cons you may want to consider when making the decision.

Pros of an Extended Car Warranty

First, the potential upsides of an extended car warranty.

•   You may save money. If your car needs a very costly repair that’s covered under your extended warranty, you could save money. Instead of paying the entire bill out of pocket, you’d only be responsible for covering the deductible (if you have one) and then the warranty provider would pay for all or most of the rest.

•   It provides peace of mind. If you’re worried about how you would cover a car repair bill, having an extended warranty can make you feel less money stress over something going wrong with your car. If your plan also incorporates roadside assistance, you won’t have to worry about breaking down on the road.

•   It can make your car more attractive to a future buyer. If you plan to sell your car down the road, a transferable warranty can make your car more appealing to prospective buyers.

Con of an Extended Car Warranty

Now, some of the downsides of extended car warranties to consider.

•   You may never use it. Many people who purchase an extended car warranty don’t wind up using it. And if they do, the cost of the repairs they need may be less than the cost of the warranty.

•   There may be overlap. If the coverage period of the extended warranty overlaps with the manufacturer’s warranty, you may end up paying for coverage you’re already getting at no cost.

•   Exclusions and limitations. Every contract comes with fine print that specifies how you can use the warranty. For example, the provider might deny coverage for a problem caused by normal wear and tear or reduce the payout based on your car’s depreciation. You may also be required to take the car to certain auto repair shops to be covered.

Are Extended Car Warranties Worth It to You?

If you are trying to decide whether a car warranty is worth it, here are a few times it may be a good investment.

1. When Your Car Is Unreliable

If you were to buy a car you were leasing and you know it tends to have a certain kind of issue (maybe the A/C is temperamental), then an extended warranty might be a good idea.

2. When You Are Worried About Getting a Big Repair Bill

If you know that you couldn’t handle a large repair bill if you were to receive one, it might be wise to get an extended car warranty. Yes, it will cost you, but it could help you avoid incurring high-interest credit card debt at an inopportune time.

3. When You Are Planning to Keep Your Car for a Long Time

Perhaps you are planning on selling your vehicle and then buying or leasing a car in the next year or two. In that case, it might not be worth it to purchase an extended car warranty.

However, if you are in it for the long haul, so to speak, you might benefit from an extended warranty. Over the years, repairs can inevitably crop up. This kind of policy might help you organize your bills better and afford to pay them.

One point to note: With an extended car warranty, it may be especially important to keep up with the cost of car maintenance. Not maintaining your car properly could lead to the insurance becoming void.

5 Tips for Choosing an Extended Car Warranty

If you decide an extended warranty makes sense for you, it’s a good idea to look at the policy contract closely — this is where you’ll find the fine print that spells out all the rules and exceptions — and not just the glossy brochure or the online advertising.

If the seller won’t show you this info before you sign on the dotted line, it can be wise to take your business elsewhere.

Here are some things you may want to look for in a contract before you sign.

1. Check the Deductible

Look at the deductible: You might have to pay $100 or more out-of-pocket every time you get a repair, before the coverage kicks in. It’s wise to know what you are signing up for.

2. Understand Whether the Policy Is Transferable

This is a consideration if you are thinking of selling your car down in the future. Typically, these contracts aren’t transferable if you sell to a dealer. So if you are thinking you might want to offload your vehicle before too long, definitely weigh this factor.

3. Know How the Service Contract Pays Out

In some cases, you may have to foot the bill and then file a claim to get reimbursed. With this scenario, it’s possible that after you pay for a repair, the claim can be rejected. If this feels like a challenging prospect, you may want to review a variety of extended warranties and see if there is one (or some) that offer a better fit.

4. Delve into the Exclusions and Requirements

You will need to read the fine print to find out what repairs are and aren’t covered and other limitations or restrictions. If, say, you have a particular concern (such as the example above, with a car that has temperamental air conditioning), you will want to make sure you are covered.

5. Check Where You Can Go for Repairs

Manufacturer-backed contracts typically require that you go to a dealer. Third-party vendors may have restrictions on where you can take your vehicle, or they may let you choose the repair shop. It’s wise to see what options are available and which extended car warranty best suits your needs.

Recommended: Budgeting for Beginners

Third-Party Extended Car Warranties

Typically, you will have a choice between an extended car warranty from the original equipment manufacturer (or OEM) and one that comes from a third party.

The OEM will be the car brand, such as Toyota or Ford? What exactly is a third-party extended car warranty? It means that a company that is not the car brand is offering you this policy. It might be an insurance or a warranty company.

Third-party policies are similar to and possibly less expensive than OEM ones, but look carefully at these points. Third-party coverage can be more restrictive and limited:

•  Are there limitations regarding what is covered?

•  Do you have your choice of where your car will be repaired, or will the policy dictate that?

•  Does the policy specify that OEM parts must be used, or could any type be used?

•  What is the deductible?

•  Will you have to pay for repairs out of pocket and then be reimbursed?

By sizing up these factors, you can find a policy that suits you best.

Recommended: Is it Smart to Buy Your Leased Car?

The Takeaway

An extended warranty could add thousands of dollars to the purchase of a car but can, in some circumstances, offer additional protection that makes it a wise buy. However, your circumstances will play a key role in whether an extended car warranty is worth it.

If you would have trouble covering the cost of a major repair and/or worrying about car expenses keeps you up at night, the cost of one of these contracts might be worth the peace of mind it can bring.

If you’re buying a vehicle with a reliable track record, however, it might make sense to skip the warranty and, instead, set aside the money you’d spend on it, and then use the funds for needed repairs.

If you don’t end up using all of it for your car, you can keep saving it or use it for something else.

FAQ

Do you really need a car warranty?

Nearly all cars come with a warranty that lasts 36 months or 36,000. Whether to get an extended warranty can depend on how much you want that peace of mind, whether you feel you couldn’t afford a major repair otherwise, and if you feel your car is unreliable.

Is it worth it to get an extended car warranty?

Whether an extended car warranty is worth it depends on your personal situation and your car. If your car tends to need a fair number of repairs or if you plan on owning it for a long time, or if you worry you wouldn’t have funds available for repairs, it can be a wise move. But if you don’t like paying for a policy you may never use, it may not be a good fit.

What are the disadvantages of an extended warranty?

In terms of the cons of an extended warranty, consider that it will probably cost at least $1,000 or more and have a deductible. It may have limitations about what is covered, it may not stipulate that original equipment manufacturer (OEM) parts be used, it may not allow you to pick where the repair is done, and you may have to pay out of pocket and then get reimbursed.

Photo credit: iStock/Pekic

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK0723045

Asset turnover ratio is a calculation used to measure the value of a company’s assets relative to its sales or revenue. It’s used to evaluate how well a company is doing at using its assets to generate revenue.

Similar to cash flow, the asset turnover ratio compares the company’s total assets over the course of a year to its sales. In simpler terms, it shows the dollar amount the company is earning in sales compared to the dollar amount of its assets. It can be calculated annually or over a shorter or longer period of time.

Why Is Asset Turnover Ratio Important?

Although having cash on hand is important for growing and maintaining a business, other types of business assets are also important, as is how a company chooses to use them. Liquid assets can include cash, stock, and anything else the company owns that could be easily liquidated into cash. Fixed assets are things the company owns that are not as easily turned into cash. This could include real estate, copyrights, equipment, etc.

For business owners, asset turnover ratio can be important when applying for loans and learning about their company’s cash flow. A higher asset turnover ratio indicates that a company is efficiently generating sales from its assets, while a low ratio indicates that it isn’t. A higher asset turnover ratio also shows that a company’s assets don’t need to be replaced or discarded, that they are still in good condition.

A higher ratio is preferable for investors, as well. Investors can look at the asset turnover ratio when evaluating the risk of investing in a company, or when comparing similar companies to one another. Each industry has different norms for asset turnover ratios, so it’s best to only compare companies within the same sector. For instance, a utility company or construction company is more likely to have a higher number of assets than a retail company.

Know, too, that asset turnover ratio is only one of many calculations that comprise the list of financial ratios that investors can employ.


💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

Formula for Calculating Asset Turnover Ratio

It’s fairly simple to calculate asset turnover ratio, which is one reason it’s such a useful tool for investors. Asset turnover ratio can be calculated using the following formula, which divides total (net) sales or revenue by average total assets:

Asset turnover = Net Sales / Average Total Assets

Which can also be shown as:

Asset turnover = Net Sales / ((Beginning Assets + Ending Assets) / 2 )

Where:

Net Sales = Gross annual sales minus returns, allowances, and discounts. Total sales can be found on a company’s income statement (typically part of an earnings report).

Beginning Assets = Assets at the beginning of the year

Ending Assets = Assets at the end of the year

Total Assets = Generally a company will include calculated average total assets on their balance sheet. However, sometimes additional calculations will need to be made.

Calculating Total Assets

The value of a company’s total assets includes the value of its fixed assets, current assets, accounts receivable, and liquid assets (cash).

•   Accounts receivable are accounts that hold expected revenues that come from when customers use credit to buy goods and services.

•   Fixed assets are generally physical items such as equipment or real estate.

•   Current assets are things that the company predicts will be converted into cash within the next year, such as inventory or accounts receivable that will be liquidated.

The formula for calculating total assets is:

Total Assets = Cash + Accounts Receivable + Fixed Assets + Current Assets

Example of Calculating Asset Turnover Ratio

To give an example of the ratio calculation, if a company has $2,000,000 in average assets and $500,000 in sales over the course of a year, the calculation of its asset turnover would be:

500,000 / 2,000,000 = 0.25 = 25% asset turnover ratio

Interpreting Asset Turnover

Sticking with the example above, we’ve calculated a 25% asset turnover ratio. What that means, exactly, is that the company’s assets generated 25% of net sales over the course of the year. In other words, every $1 in assets that the company owns generated $0.25 in net sales revenue. Again, this can be helpful when using various business valuation methods and trying to determine whether an investment fits your overall strategy.

Factors that can Cause Low Asset Turnover

There are several reasons why a company might have a low asset turnover. These include:

•   More production capacity than is needed

•   Inadequate inventory management

•   Poor methods of customer money transaction

•   Poor use of fixed assets

The ratio can also change significantly from year to year, so just because it’s low one year doesn’t mean it will remain low over time.

What Is a Good Asset Turnover Ratio?

Investors can use the asset turnover ratio as part of comparing and evaluating stocks. But what is considered a good number for asset turnover?

In general, the higher the number the better — and a number higher than 1 is ideal. This is because a value greater than 1 means the dollar value generated by assets is greater than the dollar amount that the assets cost. A higher number means a company is generating sales efficiently and not wasting assets.

Conversely, a number less than 1 means that assets are generating less than the amount of their dollar value. If a company isn’t effective at generating sales with its assets, it most likely wouldn’t be a great investment — which, again, is important to know if you’re building an investment portfolio.

Since each industry has its own standards for a “good” asset turnover ratio, there isn’t one specific number to look for. For companies in the utilities industry, ratios are generally lower than companies in retail.

Companies can work on improving their asset turnover ratio by increasing sales, decreasing manufacturing costs, and improving their inventory management. Other ways they can improve include adding new products and services that don’t require the use of assets, and selling any unsold inventory still on hand.

What Does a High Ratio Imply About a Company?

If you’re using technical analysis techniques to get some clarity around a company as a possible investment target, you’ll want to get down to brass tacks: What, exactly, is a high ratio telling you?

The answer is that a high ratio implies that a company is in good standing. It’s generating value with its assets, which can signal that it may be a solid investment. But, again, there are no guarantees.

Limitations of Using Asset Turnover Ratio

While asset turnover ratio is a useful tool for evaluating companies, like any calculation, it has its limitations. It is useful for comparing similar companies, but isn’t a sufficient tool for doing a complete stock analysis of any particular company.

Also, a company’s asset turnover ratio could vary widely from year to year, making it an unreliable measure for potential long-term investments. Even if the ratio has been similar in years past, this doesn’t mean it will continue to remain consistent. However, investors can look at the long term trendline of the ratio to get a general indication of whether it’s improving or not.

Since asset turnover is typically calculated once a year, if a company made even a few large purchases this could skew their ratio. This is fairly common, as companies might have certain monthly expenses but occasionally need to invest large sums of money into equipment, office renovations, or other common business needs.


💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.

Drawbacks of Asset Turnover Ratio in Stock Analysis

The limitations outlined above play into some of the potential drawbacks of the asset turnover ratio when analyzing stocks, too. Mostly, it comes down to the fact that as a single ratio, which doesn’t reveal the total health or financial picture for a single company. For that reason, it’s probably a good idea to use the ratio in tandem with other analysis tools and methods.

For instance, other ratios that can be used to gain an understanding of a company’s financials are the debt-to-equity ratio, its P/E ratio, and even looking at its net asset value.

The Difference Between Asset Turnover and Fixed Asset Turnover

Fixed asset turnover and asset turnover are two different ratios that can tell you about a company, and for investors, it’s important to understand the difference between the two.

In short, and to recap, asset turnover ratio looks at average total assets of a company — “total,” in this case, being the important qualifier. On the other hand, fixed asset turnover ratio looks at a company’s fixed assets to measure performance.

Investing With SoFi

Knowing how to calculate asset turnover ratio can be useful for investors who are evaluating companies as they start building an investment portfolio. While the formula is simple — Asset turnover = Net Sales / Average Total Assets — it’s important to remember that the calculations work best when comparing companies within one industry, rather than across various industries.

Additionally, there are other metrics by which to evaluate a company or value its stock. The asset turnover ratio can be helpful, but it has its limitations. As always, speak with a financial professional if you feel like you’d benefit from more guidance.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

How can you improve asset turnover ratio?

Some ways that a company can improve its asset turnover ratio include increasing its revenues, selling some of its assets, renting or leasing assets rather than purchasing them, and optimizing its inventory and ordering systems.

Is an asset turnover of 1.5 good?

Yes, an asset turnover ratio of 1.5 is a sign that a company is on solid financial footing. It indicates that a company’s total assets are generating enough revenue from its current assets.

Can asset turnover ratio be negative?

Yes, and a negative asset turnover ratio would be a signal that a company lost money during the year, rather than earned it. A negative number represents that its liabilities or expenditures exceeded its assets.

SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

SOIN0823027