Extended Warranties: Are They Ever Worth It?
Do a little homework before you decide to buy
Cue the alarm bells and roll the horror reel: The warranty covers accidents only on Thursdays, the repair center is in a country you've never heard of, the service company is owned by Barbary pirates, etc.
If you’re wary of extended warranties, you have good reason. For starters, chances are good you’ll never need the warranty. According to Consumer Reports, 55 percent of car owners never use it and, on average, those who do never use it enough to justify the cost.
“A consumer will always pay more for an extended warranty than the expected cost of repairs. That is why they are offered,” says David Soberman, Canadian National Chair in Strategic Marketing at the University of Toronto's Rotman School of Management. “So self-insuring is best if you can afford to do so.”
But these warranties, also referred to as service agreements or repair plans, may make more sense for certain people in certain situations. For example:
- Your cash flow doesn't flow. In today's economy, not everyone has money set aside for a rainy day. If you can afford a service plan but not an expensive repair bill, purchasing one might make sense. “If a breakdown or failure would create costs for the consumer that are unaffordable, then extended warranties can be attractive,” says Soberman.
Related: How to Create a Rainy-Day Fund
- You're the bull in the china shop. Do you treat your kitchen appliances like beloved pets, in constant need of love and attention? Or can you blow a hole in your microwave just by pressing the wrong button? “If a consumer knows she is hard on products, then an extended warranty can be a useful purchase,” says Soberman.
- You worry too much. People who are prone to worrying about the future might be willing to invest a little insurance money just to give them peace of mind. “They see how much it can save them from a surprise expense and the stress that goes with it,” said Tim Meenan, executive director of the Service Contract Industry Council, in a public statement.
What to know before you buy
If you're leaning toward purchasing an extended warranty, take steps to protect yourself before you say yes.
Wait until you leave the store. Don't make an impulsive decision at a busy checkout counter or in a cozy sales office. The salesperson in front of you has been trained to pitch that service plan right at the moment when you have no tools at hand for making an informed decision.
Get the facts and do the math. Ask for some literature you can take home to study. Then do some research on the product you’re buying.
“Do research on the likelihood of failure and the cost of a repair. Or if the product cannot be repaired, the cost of a new product,” says Soberman. “Do the calculation and see if it is worth it. For most common products this information is readily available on the web.
“Firms sell extended warranties that seem inexpensive but if the products rarely breakdown, they are a waste of money,” says Soberman.
Suspect the hard sell. “Listen to the salespeople when you buy your product,” says Soberman. “If they really push hard and give you horror stories about what happens if the product breaks, the [extended warranties] are highly profitable, so they are less attractive for you as a consumer.”
Call your insurance agent. You don't necessarily have to purchase the warranty from the retailer. Why not talk to the insurance company that covers your home or car?
For instance, a few insurers offer “mechanical breakdown” policies for automobiles. While you're at it, ask if your existing policies cover your household or business possessions in the event they break or can be amended to do so.
According to the California Department of Insurance (CDI), one advantage of going through an insurance company, at least in that state, is that the CDI closely regulates insurers, but not the other types of companies that offer warranties.
The National Association of Insurance Commissioners has published a recommendation to ban the selling of extended warranties during point-of-sale, such as at checkout counters.
Related: How to Get Rid of Old Appliances