Are Extended Warranties A Good Idea?
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Purchasing an extended warranty always sounds like a great idea, when you're buying electronics or appliances. The helpful salesperson working with you may have compared the warranty program to auto insurance: that is, something so fundamental to the protection of your equipment that you'd be downright foolish not to. The facts about extended warranties, however, are somewhat different. When and why to purchase an extended warranty is an important part of your personal finance know-how.
- FACT: Extended warranties are lucrative for the companies that sell them. Which means the cost of honoring extended warranties is small and profits are high, because the incidence of product problems is so insignificant.
FACT: The manufacturer's warranty covers the first several months following purchase anyway, when product defects are most likely to appear.
- FACT: Appliances that don't have defects or develop problems during the first year are likely to continue to perform well for another five years.
- FACT: Extended warranties generally cover the time period during which the fewest breakdowns are likely to occur and the least amount of repair is necessary - between six months and five years.
Taking those facts into consideration, it's also worth noting that extended warranties are not actually comparable to auto insurance, for several reasons. For starters, auto insurance can cover external liabilities, which extended product warranties do not. Also, auto insurance can be purchased at any time, while extended warranties must be bought at the time of product purchase. Auto insurance covers the life of the product, which is rarely the case with warranties. And, finally, auto insurance is very competitive. Competition within the extended warranty business is limited.
So, how do you make a decision about whether to purchase an extended warranty or not?
Ask yourself these questions beforehand:
1. Are you buying a reputable product from a reputable dealer?
2. Does the product carry a solid manufacturer's warranty against defects?
3. What are the most common problems that this product is known to experience?
4. Is there a deductible on the extended warranty?
5. Is the total cost of the warranty, plus the deductible, more than the likely repair cost, in the unlikely event it breaks down?
6. Does it make sense to make an outlay of so much additional money, at the time of purchase? Or, would it be smarter to wait and see if a problem does eventually develop, which may be years from now, and pay for the necessary repairs at that time?
7. Will you be actively using the product during the first several months following purchase, so that any defects would become obvious during the manufacturer's warranty period?
8. Is the expense of the extended warranty worth the actual risk?
The rule of thumb for assessing the merits of an extended warranty is that the total cost of the warranty not exceed 75% of the repair cost.
Doing a tiny bit of consumer research homework on the performance history of the product that you have in mind, prior to the actual shopping trip or purchase, will allow you to do a rational cost-benefit analysis on the pros and cons of an extended warranty.
Bottom line: Don't let sales staff scare tactics at the time of purchase outweigh your common sense and the statistical record of the product and reputation of the manufacturer. Some products may indeed merit the purchase of a fairly-priced extended warranty. In many cases it is not a wise purchase.