Are Extended Warranties a Waste of Money?

 

Maybe it’s a used car you’re shopping for, or maybe you’re looking at an inexpensive, standard blender because your old one just died. Whatever the item, as you’re shelling out your hard-earned cash, the question you hear from the cashier or see on your screen is almost inevitable:

“Do you want the service protection plan?”

In most instances, your answer should be a polite no if you want to make the most of your money.

 

Why you typically should reconsider an extended warranty

Most expensive consumer products statistically are quite reliable. Consumers who buy warranties for these items do so emotionally, looking to protect themselves against feeling foolish and guilty if something goes wrong without the warranty.

Consumer Reports’ 2016 Extended Warranty Buying Guide outlines some other key facts describing why most service protection plans deserve a pass:

• The express warranty you get from the manufacturer probably duplicates what you’d get from the service plan for 90 days.
• Service protection plan sales encourage manufacturers not to stand behind what they sell.
• Repairs typically cost about as much as the service plan.
• Manufacturers often will provide discount parts or repairs if a product has issues within an unreasonably short time, even if the product isn’t under warranty.
• Credit cards often extend the manufacturer’s warranty for free for about a year.
• Other insurance, such as home insurance, might cover you.
• State laws often offer protection for implied warranty of merchantability.
• Fine-print exclusions can mean the extended warranty isn’t going to cover you, anyway.

 

But don’t count all warranties out

Notwithstanding the good points Consumer Reports make, there are some cases where the price of an item might make a difference in opting for or against a warranty.

Let’s say you buy a $200 laptop. A three-year protection plan would cost you about $220, or 110% of the laptop’s original cost, and technology would probably have improved to the point where a better laptop was available in just a year or two, making repair less economical.

Now let’s suppose you select a laptop with a price tag of $2,000. Opt for a three-year protection plan for $250 and your warranty is costing only about 12.5% of the purchase cost. Technology still will be improving over your warranty period here, but if something happens without a warranty and you need a replacement, you’d be out significantly more cash. Many other electronics and appliances, such as televisions and refrigerators, follow this same principle, but keep in mind, the statistical need for repair varies, too. According to Consumer Reports, laptop PCs have a repair rate of 37%, while digital cameras break down just 8% of the time. Even if the cost of your item is high, you need to weigh the chances that your item actually will make use of the warranty.

Used items also might mean a service protection plan is worthwhile, depending on the circumstances. For example, suppose you want to buy a used vacuum off eBay. The vacuum is from a private seller, so it isn’t covered under implied warranties, as it might be if you bought it from a shop that regularly sells used vacuums. Additionally, the original one-year warranty is expired. Here, you have zero protection if it fails, so an inexpensive warranty from a third-party company could end up saving you money.

Home warranties on existing older homes can be a good deal, as well. These warranties cover items in your home such as your oven, heating system and plumbing. They’re designed to keep everything operating, not necessarily to replace products entirely, and thus are repair focused. In used homes, systems and appliances often already have several years of use and aren’t covered by original warranties anymore. For example, your heat goes out and you pay the $262 repair price. You also do some air conditioning work costing about $326 when summer rolls around in a few months. If you paid $300 for the warranty and another $100 as a deductible for each repair, you’d still come out $188 ahead. If repairs are on the high end ($800 and $1,000, respectively), your savings easily could be several times this.

 

A loose rule of thumb

In general, if the price of a warranty is 10% to 15% of the purchase price, you’re probably getting your money’s worth, according to William Duckworth of Creighton University. But if you’re on the fence, ask yourself questions similar to the following:

• How high are the odds that repairs will be necessary, based on failure rates?
• Does the coverage offered have limitations or exclusions?
• Will I get any additional benefits from the warranty, such as coverage for accidents?
• What’s the claims process like? Will I deal with the retailer or warranty company, and how long does it take for a typical resolution?
• Can I identify the company responsible for the contract, and do they have a good reputation with clear contact information?
• What alternatives (e.g., third-party warranties) are available?

 

Bottom Line

Generally, extended warranties end up being better for the retailer than you. But there are cases where having one does make financial sense. Ultimately, you need to consider multiple points, do the math and decide how much you want peace of mind to factor into the equation.

 

Wanda Thibodeaux is a freelance writer and sole proprietor of Takingdictation.com. Her work has appeared in online and print publications such as The Finance Base, Legal Beagle, Bankaroo and Inc.com.

 

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