Extended Warranties: Deal or No Deal?

Extended Warranties: Deal or No Deal?

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?

10 Responses to “Extended Warranties: Deal or No Deal?”

  1. Anonymous

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  2. Anonymous

    Extended warranties are not “similar” to insurance; they ARE insurance. That’s why for many big-ticket items such as cars, they are underwritten by insurance companies. The decision of whether or not to purchase an extended warranty comes down to the same two questions that should govern any decision to or not to purchase insurance: “Can I afford to fix or replace it if it breaks;” and “am I willing to live without it?” If the answer to both of these questions is “no,” one must purchase the warranty. It’s as simple as that.

  3. Anonymous

    It depends entirely on what product you’re buying the warranty for. My riding mower, definitely. The second time we used it the deck dropped. We didn’t have to take the mower in to be repaired – they came to the house. Now, it’s something else with the mower. Over $2000 worth of work & parts someone came to my home to fix. The little electronic bugs I bought yesterday, definitely not. The store wanted 99 cents to insure a $10 toy for a year! I actually laughed when the clerk asked me about it.

  4. Anonymous

    Apple Care on computers (not on iPods or the like). Have used it many times. Very much worth it.

    We decided to buy an extended warranty on our new stove/oven because the stove is flat top so if anything goes wrong with it, it’s not something we can fix ourselves. It cost $40 or $50 for 5 years (I think…) which was a reasonable trade-off to us.

    Otherwise, I don’t think we’ve ever bought an extended warranty on anything, and I don’t think we’ve ever wished we had.

  5. Anonymous

    Exteneded warranties are exactly like insurance, and the companies that offer them have years of data to back up their computations about the exact likelihood of something breaking. You would do much better to save the money you would have spent on extended warranties in almost all situations to build a fund that would help you pay for the cost of repairs or simply help you replace the item with a new one.

  6. Anonymous

    I was just thinking about this issue, though in a related topic. My gas company offers service plans for repairing appliances if they break. There is a basic plan and a total plan, but I don’t think that either one is good for me. The reasoning is that although both plans are not very expensive, the gas dryer and gas furnace are very old, and if they break, it’d be better to replace, and apply any money spent in the repair plans towards the purchase of new equipment.

    But I do agree with BG in that the repair plan depends on what items we’re talking about. There is no cover all solution, but I think generally speaking I agree with Nickel in that most repair plans are a waste of money.

  7. Anonymous

    The last extended warranty I purchased was for a GPS device I bought from Best Buy. The warranty was for 4 years, but it didn’t cover accessories like the power adapter. Of course they don’t highlight that fact when they’re selling you the warranty. In four years, the power adapter was the only thing that broke!

  8. Anonymous

    Is it worth it? It depends on the item being purchased, the base manufacturer warranty, the details of the extended warranty, and its cost.

    It is very hard to generalize this to say “Yes, it is worth it”, or “No, it is a ripoff”.

    Some extended warranties are worth it, some aren’t. Last year we purchased a new car, and opted to get the manufacturer extended warranty — which brings us up to 6 years bumper-to-bumper. To me: it was worth it, to you: maybe not. My thought process was that this new vehicle is crammed full of (proprietary) electronics and expensive safety equipment: and if/when that fails it will cost a tremendous amount of money to fix.

    Now, the trick is: if nothing breaks, then I ‘lost’ that money. If something major breaks, then I ‘made’ money.

    It just like any insurance policy really, like health insurance, life insurance etc. You wish you had the policy after you realize you needed it…

    Now, if you are talking about a $100 digital camera (or other similarly priced electronic device): I won’t purchase the extended warranty. Reasons: the device is pretty cheap to begin with, and if it breaks I’ll purchase a brand-new device with twice the capability for about the same as the original purchase price — even if that is 2 years from now.

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