Tuesday, February 1, 2011

Are Extended Warranties Worth the Money?

If your like me have you noticed the deluge of ads for big screen TV's. You know it's Super Bowl time again when you get that yearly itch to get that new LCD or plasma TV. Why don't they have the Super Bowl around Christmas so I have a good excuse to give my wife a new set. You know it would be for her.

Marching down to Best Buy to get a new set is bad enough, but when you finally check out the clerk asks you if you would like to buy an extended warranty. You freeze, like a deer in the headlights. There is nothing like having to think in a split second to spend the extra money on something you haven't thought through while the burly guy behind you is waiting to make his purchase and the clerk is staring at you.

The debate over extended warranties is never quite over. We are offered these warranties for everything now a days. I bought a $50 voice recorder and was offered a extended warranty of 2 years for $10. Would it make sense to purchase it or pass it by? I don't know I'll have to do the math and get back to you.

I can see maybe getting a warranted on things $500 and up. On items that you know are expensive to repair. Not things that are necessarily throw away items like a voice recorder.

So what do consumer agencies say about extended warranties?

  • Most products don't break during the warranty period. If they malfunction right away, they're covered by a store return policy or manufacturer warranty.
  • The cost of the warranty is almost as much as the cost of a repair. So, buying a warranty is like paying for most of a repair, whether you need one or not.
  • You can self-insure by setting aside the same money in a repair fund. If the item doesn't break, you get to keep the money.
  • As a general rule, you shouldn't buy insurance for little things, only for financial disasters. If a repair cost won't wreck your finances, you probably don't need the coverage.
  • Some higher-tier credit cards will extend the manufacturer warranty for free if you purchase the item with the card.
  • The benefit of a warranty is mitigated if you have to pay a deductible.
  • A warranty might call for replacement with a refurbished unit, not a new one.
  • The extended warranty usually starts when you buy a product, largely duplicating the manufacturer warranty for some length of time.
  • You know warranties are a bad deal for consumers because electronics retailers make a huge share of their profits from them.

On the other had the warranty industry has their arguments:

  • Warranties extend your protection, providing peace of mind for typically 10 to 20 percent of the cost of the item. If a warranty costs more than that, make sure there's a good reason.
  • Extended warranties usually offer service and protection a manufacturer warranty does not. That includes in-home repair or replacement, generally quicker turnaround for repairs, around-the-clock and weekend technical support, coverage for damage caused by power surges and the ability to transfer the warranty.
  • If you regret buying a warranty, you can cancel, typically within 30 days, for a full refund, not a prorated one.
  • Repair prices are often more expensive than warranty costs. An LCD television costing $550 would typically have a service-plan cost of $55 to $110, while the cost of repairing a main system board, for example, might cost $375.
  • A self-insure repair fund is a good idea, but, as a practical matter, consumers won't set aside money for repairs.
  • Some extended warranties cover accidents. As electronics become smaller and more portable, there will be more dropped laptops and cell phones in the toilet. Manufacturers typically don't cover accidental damage.

The bottom line is, the statistics and math say that buying an extended warranty is a bad move if you want to save money. Warranty companies are in business to make money and if they were paying off on the warranty contracts they would be out of business. They know the chances of your item needing repair is nil, thus they make money. Use that same data in your decision to purchase an extended warranty. 

There is one other thing that warranties provide that is not in the fine print. That is warranties give piece of mind. The value of that is hard to quantify.

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  1. Good point about checking the warranty extension provisions on your credit card. Sethi, in "I Will Teach You to be Rich" (worth checking out of the library) on p.31 says"...Most cards extend the warranty on your purchases. So, if you buy an iPod and it breaks after Apple;s warranty expires, your credit card will cover it up to an additional year. This is true for nearly every credit card for nearly every purchase, automatically."
    Worth checking out before you've got the "burly guy" breathing down your neck.

  2. I think using the credit card extended warrantee is a no brainer and something most of us forget about.

  3. I always get extended warranty... my CC provides it! Haven't made use of it yet, so no idea how good these are.

  4. Like all insurance you never really know how it will perform till after it's to late. It gives a level of comfort that's fo sure. Does it make sense money wise, probably not. I'll bet those that do buy it, probably forget they even have it when the item breaks.

  5. My policy is to keep a big enough emergency to cover repairs. I might get burnt occasionally, but in the long run, I am certain to come out ahead.

  6. I have never once purchased extended warranty. I usually buy a new item if things break and never really had any problems with any products for 4-5 years.

  7. @Joe , @mba student. These warrantees are just an insurance that plays on a persons fears.


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