Are Extended Warranties Ever Worth It?
Extended warranties definitely have a bad rep.
Consumer Reports and a number of other trusted publications have repeatedly warned consumers that they often aren’t worth buying. They are not cheap. They may not cover what you think they cover. The warranty work may be unreliable. And the manufacturer’s warranty may be all you really need.
For these reasons and others, consumers may have a right to be cautious about extended warranties, but they are not always so black and white. In fact, many people buy them and have no regrets.
So much has been written about why consumers should steer clear of extended warranties, so in this article, we’ll focus on the upside and spell out why they might be well worth buying for some consumers. First, we’ll explain what extended warranties are and what they do.
What Are Extended Warranties?
Extended warranties typically cover the costs of repairing or replacing an item – everything from a toaster to a truck -- during the manufacturer’s warranty period, but very often the coverage period extends beyond that to somewhere between two and five years after the item is purchased. Extended warranties also may cover things that the manufacturer’s warranty does not cover such as normal wear as well as damage caused by a power surge. What’s more, the best ones may pay for additional services such as annual cleaning and preventative maintenance.
Consumer Reports points out that extended warranties don’t make sense for the consumer if they cost 20 percent or more of what the item cost. The rationale behind that is the cost of the warranty is not likely to be less than the cost of a typical repair.
Extended warranties are like insurance in case something breaks, and that varies depending on the product. Consumer Reports published this list that shows the repair rate for various products: desktop personal computers -- 37 percent, laptop computers – 33 percent, refrigerators – 28 percent, washing machines – 22 percent, projection TVs – 16 percent, vacuum cleaners – 13 percent, dishwashers – 13 percent, clothes dryers – 13 percent, microwave ovens – 12 percent, camcorders – 8 percent and digital cameras – 8 percent.
Given the relatively low repair rates for some of these products, industry experts estimate that profit margins on extended warranties are a whopping 50 percent. And that helps explain why many salespeople want to sell them. They come with relatively large commissions. In the electronics retail world, some salespeople refer to a good sale as a "hot dog" and a good sale with an extended warranty as a "chili dog with cheese."
Warranty Week estimates that consumers spent more than $16 billion on extended warranties last year. In a PC World survey of consumers, about 63 percent said they bought extended warranties and 71 percent of those said they are glad they did. Of the 37 percent who didn’t buy extended warranties, about a quarter of them said they wish they had.
So Why Do So Many People Buy Extended Warranties?
It gives them peace of mind. It’s an undisputed fact that we are wired differently and some people just worry more than others. Many of the worrywarts find that it is worth paying something to worry less. If something breaks, they know they won’t have to pay to fix it. That gives them peace of mind and it is one of the reasons people buy insurance. It makes them feel better to know they have it -- just in case.
It is a good use of money. Folks who don’t have a lot of extra money lying around like extended warranties. Let’s say they just bought a car and the purchase drained their savings or the loan they needed to buy the car has put a stress on their household budget. If something big goes wrong with the car – if they need a major repair on it – the warranty will keep them from having to borrow more money to pay for it and make payments on yet another loan.
It makes sense for people who are not gentle consumers. Are you hard on your purchases? Do you have toddlers who don’t know any better or teenagers who are just plain careless? Maybe you have a laptop and you assume that it is a pretty good bet that one of your kids – or maybe you or your spouse – will break it sooner or later. If so, extended warranties might very well make sense for you.
It’s part of a gift. You are giving someone an expensive gift and maybe you wouldn’t buy an extended warranty for yourself, but you know the recipient would really appreciate it. So it’s like you’re giving two gifts: the initial gift and the knowledge that he or she won’t have to pay to fix it if it breaks. It’s like icing on the cake.
So, as you can see, extended warranties make sense for a lot of people for many of the same reasons that insurance makes sense. Make sure you figure out whether it makes sense for you before a salesperson tries to sell it to you.