The Conundrum of Whether to Buy Extended Warranties

Think back to the last time you bought something that came with a warranty. Maybe you bought a TV or computer, or perhaps it was a blender or refrigerator. Do you remember any extended warranty offer that came along with that purchase? Did you find yourself teetering on the fence of choice, not sure if you should pay for the extended warranty or not? If you can’t remember such an experience, chances are you’ll be faced with this decision sooner rather than later. When you are making that decision, hopefully you’ll remember these tips and tricks to know if an extended warranty is right for you.

Why You Might Feel Pressured to Buy

Let’s start off by figuring out why extended warranties are regularly offered on purchases of consumer electronics and appliances. In a study on the topic, Robert S. Smith of the University of Maryland estimated that about 1 in 3 Americans buy extended warranties each year. The total spent on extended warranties each year in the United States is approximately $1.6 billion. While this is a fraction of the total amount spent on consumer goods, companies that sell extended warranties make about 50% of their profits each year from selling extended warranties. No wonder we sometimes fell pressured into buying extended warranties!

How to Take Control

Now, lets figure out if it is worth paying extra for that extended warranty. The following steps will help you make the decision that is right for you.

Step 1: Take a step back, take a deep breath, and take everything you are hearing with a grain of salt. The salesman is more likely than not telling you all the reasons why you “need” this extended warranty. But you are an educated consumer, you have read this blog, and you know there are two sides to every story.

Step 2: Ask yourself, “Do I really need the warranty?” Significant amounts of research suggest that most products don’t actually fail within the warranty or even extended warranty periods. This is what the seller is banking on when they sell you an extended warranty. Do your research, though; the Internet gives consumers easy access to product reviews. Use that resource, but keep in mind that complainers are often more vocal than satisfied buyers. A list of common consumer goods and their average repair rate can be found here. A few more factors to consider include:

  • Price of the Product: After spending so much on a warranty and service fees (discussed below), it might be logical to just buy a new one. One rule of thumb is to be cautions about buying an extended warranty on a product costing less than $200. Another suggestion is the “20% Rule”, that you should not pay more than 20% of the price of the product on an extended warranty.
  • How You Plan to Use It: Will you use the product a infrequently or hundreds of times per day? Is it a portable good or one that will never leave your desk or kitchen? For example, a laptop is probably more at risk to break than a desktop computer.
  • Start a “Fix-It Fund”: Set aside the money you would have spent on all your extended warranties in a separate account. If you can control yourself to only withdraw from this account when you need to pay for a repair, this is a great way to hold on to your money. Chances are you’ll be better off spending less and gaining interest than shelling out the dough for every extended warranty you are offered.

Step 3: Ask to see the extended warranty. Don’t rely on what you are being told—take 5 minutes to see what the extended warranty actually covers. You might be surprised at what you find. Here are some things to look for:

  • Start Date: Many consumer goods already come with a manufacturer warranty, which starts at the time of purchase. If you buy an extended warranty for 2 years but that extended warranty also starts at the time of purchase, you would have an overlap year of double warranties that you don’t need.
  • Parts and Issues: Extended warranties may not cover certain parts or issues you might have. For example, you might only be covered for certain internal parts, and not be covered for an internal battery or accidental/cosmetic damage to a screen. Alternatively an extended warranty could cover more than the manufacturer warranty.
  • Service Fees: Often there is a service/labor fee or deductible that you’ll have to pay to actually get a part fixed or replaced. This could range from $10 to $99 depending on the product. Compare the price of a repair without the warranty with the warranty plus the service fee.

Step 4: Consider your own risk tolerance and creation. If not having a warranty will keep you up at night or make you afraid to ever use the product, do what you need to stay sane. Similarly, if you have bad-luck, clumsy genes, or careless kids, an extended warranty might make more sense.

But Wait, Before You Buy or Walk Away…

It never hurts to negotiate. Always try to see if you can get the price or coverage you want, or negotiate other terms that are important to you. Also, shop around and see what other sellers’ extended warranties cover on similar products—you just might find a better deal. Finally, you might be able to get a free extended warranty from other sources, like your credit card. For more info on this, look for my other blog posts.

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