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Are Extended Product Warranties Worth The Money?

By Michael Haltman

This past weekend I was in my local appliance store buying a television. When checking out I was asked the question that people are always asked in this situation, but it’s a question that most people don’t typically know how to answer:

Sir (Madame), would you like to buy an extended warranty?

We all know the drill from there. The salesman will tell you that the manufacturers limited warranty is good for one year parts and labor, but that most problems surface after that. You can buy a one, two or three year extended warranty that covers everything including your first born child, and they will come to your house to do the repairs.

Being somewhat cynical I have the feeling that these warranties are an extremely large profit center for the store. But that doesn’t necessarily make them always bad to buy. What will happen if I buy one and the store or chain goes out of business? I know that I had that experience with Comp USA who fortunately used an outside firm so that my warranty was still honored. But what if they don’t? So many thoughts are going through my mind, but the salesman is still waiting for an answer: Yes or No.

WHAT SHOULD I DO?

The question becomes whether these warranties are really worth the money, and on which products should you consider purchasing one of them? These contracts are sold on items as small as a toaster and as large as a car, so what is the general rule of thumb?

The truth is that there is no correct answer to the question. Simplistically, if/when you go to replace the product in a few years and you haven’t needed the warranty, then you shouldn’t have purchased the warranty. If you have used the warranty and it saved you money over and above what you paid for the warranty, then it was a good buy. Similarly, if something breaks and you don’t have the warranty, well, you get the idea.

Here are a few guidelines.

Price of the warranty versus the price of the product – If you are buying a toaster for $50, and the extended warranty is $20; it’s not worth the price. If after two years the heating coils break you will most likely want to buy a new one rather than fix the old one. Further, toasters are typically not fragile appliances. On the other hand, if you are purchasing a laptop computer for $1,800 and the extended warranty is $150, the warranty may in fact be worth buying. A computer is a piece of equipment that has many parts that can cease working for one reason or another with a high replacement cost. Rather than having to go out and either do the repairs yourself or buy a new computer, the $150 price could be worth it.

Cost of replacing versus fixing – Similar to number one above, if you can afford to replace or fix the product were it to break, it will give you the option to weigh the pros and cons of the warranty based on its price and the products historical reliability. On the other hand, if you are purchasing a used car and knew that it would break down and the expense of repairs would be a problem, then you would most likely have no choice but to buy the warranty.

Your credit card may already take care of it – Everyone talks about the question surrounding optional insurance at the rental car counter if you use a certain credit card. The same holds true with purchases that include a manufacturers warranty. Check with the issuer to find out if using the card provides extra coverage, and if it does what that extra coverage is. This feature can save you a good deal of money.

Get the specifics of the coverage – Find out exactly what the warranty will cover and won’t cover. Get in writing if it covers parts only, parts and labor, accidental damage, etc. Nothing is worse than assuming you are covered only to find out that you aren’t. If the coverage is weak, then the warranty may not be worth the money.

The more you know – If you are purchasing a product that you have purchased before and know the quality and the length of time it should last, then you may already know the value of an extended warranty. If someone you know has purchased the product and has had some problems, then the warranty may be a good idea.

The bottom line is that there is really no cut and dry formula as to when you should or should not purchase an extended warranty. There are many factors that go into the process.

To the question that you have most likely been asking yourself, I did not purchase the extended warranty for the television.

Michael Haltman
Former fixed income analyst/trader and institutional salesman for some of the largest firms on Wall Street, some of which no longer exist. Was a proprietary equity trader for Opus Trading for fifteen years until opening my own commercial lending firm, and mortgage title insurance firm. Contribute articles to many publications including Money Crashers, and have had articles picked up by The Wall Street Journal, Chicago Sun-Times and Houston Chronicle to name a few. Also created and write The Political Commentator which examines the world from the right.

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  • Connie

    I am so through with extended warranties. I got one on my hubby’s laptop. The battery was defective. We brought in the battery for an exchange. They said that we needed to bring in the laptop and send it away for 2 weeks. He has confidential info on it and sending it away for 2 weeks is not going to work. We sent my son’s laptop away for a switch that stopped working. It took 6 weeks to get it back. And then they charged us for it because they said it was normal wear and tear. REally a switch becoming non-functioning is normal???

    So all in all. you pay they don’t live up to their end of the bargain. Not going there ever again.

  • http://politicsandfinance.blogspot.com mhaltman

    Hi Connie:

    That is an excellent example of a warranty not doing what it is supposed to do. Hopefully the store you bought it at made things right.

  • http://grandgiveaways.wordpress.com Mami2jcn

    I recently bought a netbook and was asked if I wanted to purchase the warranty, which would end up being almost as expensive as the netbook itself! So I passed on that. In the past my husband and I have gotten extended warranties on our cars, which we think makes sense because we like to keep our cars in good working order long after we’ve paid them off.

  • http://politicsandfinance.blogspot.com mhaltman

    You definitely have to pick and choose as to what makes sense for you. Thanks for writing.

    Mike

  • Karmella

    I have heard too many stories about the hoops you have to jump through for warranty service, the exclusions, the failure to actually fix the broken item. I start from a place of “no” when it comes to extended warranties.

    I shouldn’t admit this, but my organization is awful, and I probably wouldn’t be able to find all of the receipts and whatnot needed for the warranty service anyway.

    I would add to also consider the time to have the item fixed under warranty – if you need your laptop urgently, you might rather have it fixed on your own rather than waiting for warranty service.

  • http://politicsandfinance.blogspot.com mhaltman

    You definitely have some strong arguments against the warranties. Thanks.

  • Michael

    A lot of times, you can negotiate a lower price if you buy a warranty. I have had instances where they would knock $20-$30 off to buy a $25-$40 warranty, because the sales people sometimes got better commission for warranties.

    Also, I have bought warranties for computers such as my Macbook Pro on ebay for 1/2 the price of retail.

    • Erik Folgate

      Good point about buying the warranties on eBay for a fraction of the price. I know some people are weary about this, but I know a lot of people that have bought legit Apple Care warranties on eBay.

    • http://MyCustomerWins.com honest4sure

      Most retailers fire people for doing that – it’s called “packing” the service contract by reducing the profit on the product. Your right, the pressure to sell the service contracts sometimes manifests itself this way. Funny thing, you can still cancel the service contract and save additional money.

  • http://politicsandfinance.blogspot.com mhaltman

    That is excellent advice to check out Ebay for deals!

  • Mike

    I got a warranty for my TV through Squaretrade. $30 for 3 years and it covers accident damage. I figured it was worth it since the TV sits near the sink.

  • http://politicsandfinance.blogspot.com mhaltman

    For $30 it sounds like a good deal.

  • http://blog.budgetpulse.com Craig

    Other than for a computer I don’t think it’s worth it at all, just a waste of money.

    • http://MyCustomerWins.com honest4sure

      If you actually look at what Best Buy charges – for instance – $220 on an under $500 laptop for “2” years (one addtional on top of mfr and years 1&2 for damage) you just might conclude that not only is this absurd, but a total ripoff.

  • http://politicsandfinance.blogspot.com mhaltman

    Cars as well, but I think it comes down to a case by case look.

  • http://www.chasingprosperity.com thriftygal

    On more than one occasion, my cell phone has stopped working right after the warranty expired, and I had to pony up the cash for a replacement. Needless to say, I don’t buy warranties anymore.

  • http://politicsandfinance.blogspot.com mhaltman

    On the other hand I take cell phone insurance which will replace my phone if it is not only lost, but broken as well which has come in handy on multiple occasions.

  • http://www.artificialrobot.com Sean

    I did end up buying AppleCare for my mac laptop, and I have to say so far it has come in handy a few times. I have been able to bring in my laptop to an Apple Store and within about 10 minutes walk out with a fixed machine. I had a problem with my webcam and Apple sent me a box overnight, I sent my machine to them overnight and had it back the next business day. I think it has paid for itself.

    All that said, I wouldn’t recommend extended warranties for many products. I used to work at Best Buy and we could get anything in the store for 5% over cost including the extended warranties. Let me say that the extended warranties were usually a fraction of the cost. Basically, this is a very high margin product for most retailers. Most people never use them and if they do, the cost to use them is small or they don’t qualify. If you buy a plan, make sure it will cover what you expect and that it is a reasonable price. Otherwise, just save up some extra for problems down the road just in case.

  • Elizabeth I

    Shop at Williams Sonoma for kitchen products. You can return anything that breaks (aside from Jura Capresso coffee makers, to my knowledge). I have found that kitchen gadgets do break (I have gone through 3 Beaba’s $150 each and I am on my third bread maker). It is worth it to pay a bit more to shop there.

  • http://politicsandfinance.blogspot.com Michael Haltman

    Great advice!

  • robyn

    I’ve had varied experiences with warranties. Got an extended warranty on my hd tv and when a part went out got prompt in home service that would have been very spendy. I have extended coverage on my 2008 honda, but bought it through my credit union at a savings. I’ve observed some of the hassles regarding laptop warranties and wonder if the hassle is worth it.

  • Mac

    I made the mistake of buying a warranty for a monitor once many years ago…what a waste of money. It’s never worth it for electronics, because they go down in price so quickly. Plus, most credit cards double the manufacturer warranty anyways, so you usually get 2 years warranty for free.

  • gina

    I used to buy the warranties on big ticket items, only to find that they have expired long before I have had a problem. Definitely not worth the money. Save the money you would have used for warranties!

  • DG

    I don’t think they are worth it for every electronic luxury. However, on some items they are good such as new digital cameras and especially laptops (had a positive experience with this)

  • jeccica simpson

    Yeah, I have never bought extended warranties, I think its another sales pitch in my opinion, but its like auto insurance, if you get into an accident and dont have it your out of luck and out of pocket. I am lucky, I have a husband that is Jack of all trades, can fix everything. But for people who dont, I really feel for, cause you dont get anything if it never breaks down and usually it happens after the warranty expires, funny how you hear that always happens! HA HA HA!!

  • http://www.insweb.com/home-insurance/home-insurance.html Robert

    My hero Clark Howard says that extended warranties are NEVER a good deal, especially with retailers going out of business left and right. The warranty is no good if the company goes belly up.

    • http://madsaver.com Mac

      I agree completely. However, a lot of retail & online vendors now partner with a 3rd party warranty company, so if the store goes out of business, you’re still safe…assuming that 3rd party doesn’t as well!
      Personally, I always avoid ‘em.

  • Lauren

    The only times I have gotten an extended warranty are for my computers and once for an IPod. My last computer started having problems after the regular warranty had run out. Luckily I was able to get it fixed because of the extended warranty. Because of that experience I got a extended warranty for my current computer.

    I got an extended warranty of my first IPod. I’m glad I did because it to died after the Apple warranty had run out. Luckily I was able to get a refund for the amount because they no longer made my model of Ipod. That being said, I didn’t get an extended warranty for my current Ipod.

  • http://makingcentsoutoflife.com Kristin @ Making Cents Out of Life

    To be honest, we’ve never bought a lot of things in our 5 years of marriage that were expensive enough to warrant buying an extended warranty. Sorry I couldn’t word that any other way. We did buy an extended warranty on our first 42″ HDTV, because we’d heard conflicting arguments on the pros and cons of the warranies and couldn’t afford to buy another one if it crapped out within 2 years *or later but we’re just SOL if that happens*. We really actually shouldn’t have, and should have just paid for the repair, because we got a year from the store where we bought the TV anyway and they are already $150 less than we paid for the darn thing a year ago. So it was a live and learn experience that I wouldn’t repeat. When I bought my netbook, we were offered the warranty but as somebody else said it was almost as much as the computer (especially as it was only $125 on clearance!).

    My dad pretty much taught me to take care of what I have, and usually that’s enough to get a long life out of things. Plus he can repair almost anything, and what he can’t my husband can. Chances are, you’re overpaying by at least 50% to fix a problem a $20 part would suffice.

    Again, we’ve never bought many big ticket items because I’m disabled but things don’t last forever. Get your normal wear and tear but take care of your stuff and you can usually extend the life of something easily enough. Extended warranties make saense to me when it comes to cars that get a lot of use, but not much else.

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  • JuliaA

    the only things i buy warranties on are laptop computers–so many little things can go wrong, and i’ve made good use of my warranties.

    most others are just too expensive compared to the cost of what you’re buying, like you mentioned.

  • http://MyCustomerWins.com honest4sure

    You have much better odds at the blackjack table. Save all you money and you’re way ahead of the game. Most of the big box service contracts are priced for two parties to benefit: the retailer and the plan administrator. Sales people offer them because they are forced to by their managers. Cashiers the same and generally they don’t know better. Service plan sales pitches are chock full of half-truths, lies and deceptions (check the website). Does Best But really respect you, the customer, when they offer you a laptop service plan with damage and battery coverage for only 1 year on top of the manufacturer for $220 on a $479 laptop? Really? Does the length of the plan have anything to do with the life of the product? Never. Product failure rates (excluding you damaging it) are very low for most electronics – check Consumer Reports brand reliability. Is that “replacement plan” for year 2 only really significant? What’s so special about year 2 in the product life cycle? As stated elsewhere, your Amex and some other credit cards give you a year 2 warranty for free. Make a rational decision and don’t let the sweet talk of anyone sway you.

  • http://www.warrantyheadquarters.com/ Car Warranty

    I find that third parties offer similar warranties for less than the dealers. And as long as the car warranty covers what needs to be covered, and is accepted at repair shops, a third party dealer is just as much of an option as a dealership!

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