Whether you purchase a new car, a washer or dryer, or the latest electronic gadget on the market, you have most likely been offered an extended warranty or an additional service plan to protect your purchase. Extended warranties are typically not cost beneficial for consumers, but they are a cash cow for retailers.
Because of the excellent profit margins on these extended warranty programs, more consumers than ever are being pushed to buy one with their purchase. In many cases, 50% of these extended warranty plans’ prices go straight to the retailers’ bottom line as profit.
Extended warranties aren’t worth it
Retailers have a legion of accountants and actuaries that calculate the cost of programs like extended warranties. They are very similar to an insurance policy for the retailer, and the odds of an extended warranty costing more than the premiums you pay are very low.
Consumer Reports has found that most products rarely break during the extended warranty period. And, if the item does break, the average repair cost has been found to be roughly the same as the extended warranty’s price. Moreover, some of the repairs that a consumer might need are already covered by the regular product warranty.
In light of the above, many retailers have changed the name of their extended warranty program in hopes of avoiding the bad press that these programs have received over the years. But, make no mistake about it, whether they are called an extended warranty, service plan, performance plan, or any other name, they still are not cost beneficial to consumers.
Fortunately, there are a few ways that you can have the benefits of an extended warranty without taking a bath on these plans. You can ultimately build your own plans through insurance, your own savings, or by using a credit card.
Use an insurance rider
One possible way to prevent having to purchase an extended warranty is to talk to your insurance company. Many items for which you might consider buying an extended warranty can be covered under your homeowner’s or renter’s insurance. For example, you could consider adding a specific rider on your insurance policy that covers a specific item, such as a high cost piece of electronics.
A low cost rider attached to your homeowner’s or renter’s insurance policy can cover a substantial amount in damage to items in your home, and may be a great alternative to paying for an extended warranty that may only cover you for a short period of time, and which you may never use.
Establish your own extended warranty fund
Another great way to save money on the expense of an extended warranty that you may never use is to create your own extended warranty fund. Since most extended warranties expire without you needing to cash them in, and since most extended warranty repairs cost about the same amount as the warranty, you could save the premiums and use them to repair or replace any items that break down.
Using a dedicated high interest savings account is a great way to set money aside for an extended warranty fund. As soon as you purchase the item, add the cost of the warranty that you didn’t buy to your dedicated savings account. Using the money that you would have paid for an extended warranty to fund a online savings account can hedge you against the costs of repairs and the high costs of an actual extended warranty.
Use a credit card that offers extended coverage
Some of the best credit cards offer extended warranties on items purchased with the card. Using credit cards that offer this sort of buyer’s assurance warranty program gives you an alternative to expensive extended warranties. Programs from companies such as American Express can at least double the manufacturer’s warranty on a wide variety of products.
While extended warranties can offer you a little peace of mind when you make large purchases, they are another example of unneeded insurance. Instead of wasting your money on one of these plans, you should consider the alternatives listed above. You’ll come out ahead in the end.
What about you? Are there situations in which buying the extended warranty makes you feel better? Do you mind overpaying for peace of mind? Or do you avoid these plans and pocket the difference?