Extended Warranties 101

When to Buy an Extended Warranty

Extended Warranties 101
August 6, 2014

If you purchase any expensive item, you can expect a pitch to purchase an extended warranty – automobiles and electronic devices are especially known for the corresponding hard sell.

From an economic standpoint, these are rarely a good idea. Here are several of the reasons why:

  • Standard Warranty Coverage – How good is the coverage on the existing warranty? Generally, any defect-related problem – the sort of thing covered by standard warranties – will go wrong within the standard warranty period. This is especially true for major appliances like refrigerators and ovens, which are highly reliable and rarely fail.

  • Replacement vs. Repair – For lower-priced items, a replacement may be just as economical and preferable – especially for things like electronic devices that rapidly depreciate and/or become obsolete.

  • Repair Costs – A typical warranty is around 10-20% of the price of the item, which in some cases is pretty close to the cost of independent repair.

  • Extended Warranty Coverage Gaps – To be worthwhile, extended warranty coverage needs to be fairly comprehensive. Check the exclusions on the extended warranty – at that point, you should expect failure to come more from wear and use than from a defect.

  • Credit Card Coverage – Some credit cards automatically extend the manufacturer’s warranty assuming that you make the entire purchase with your card. If you want more credit, check out MoneyTips' list of credit card offers.

    Consider that only about $20 of every $100 spent on warranties in the US is ever used to deal with defective products. The rest is pure profit for the stores or third-party warranty services.

    Are there any circumstances where an extended warranty is economically worthwhile? There can be.

  • Proprietary Repair Situations – Unique and relatively expensive items that are difficult to repair or that generally require proprietary dealer parts and services may benefit from an extended warranty. Higher-end Apple products are a good example.

  • Some Mobile Electronics – Laptop computers and cell phones are transported so often that they are at a higher risk for breakage. An extended warranty that covers accidents and damage may be worthwhile. It would also need to fall within the typical range of obsolescence (around three-to-five years for most systems).

    Since the days of the subsidized cell phone are coming to an end, warranties on cell phones are becoming more attractive – but again, the accident coverage is critical.

  • Used Items – Expensive used items like used cars may be worth the extended warranty, because there is a reasonable expectation that a used item is more likely to break down – but again, check the exclusions extensively. Wear is a more likely culprit, and the coverage needs to be relatively comprehensive.

Presumably, you have done your homework on reliability as part of your purchase decision, so if you decide to proceed with an extended warranty, you should have a pretty good idea of what a useful extended warranty should cover. If you haven’t checked online product reviews, that is the place to start.

As well as checking exclusions, also you need to research how easy the repair or replacement process will be. Will it be done locally? Is shipping involved, and who pays those costs?

Finally, never be pressured into buying an extended warranty. You do not have to buy it at checkout time. It is wise to check into other sources, such as direct warranties from the manufacturer, as part of your pre-purchase routine. Investigate third-party warranty companies like Squaretrade.

While in most circumstances, extended warranties do not pay off, there are some circumstances that make them worth the cost – and if you require them for your own peace of mind, it really does not matter whether they are economically worth the cost or not.

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