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Money November 2012

Dollar Sense

Should You Spring for the Extended Warranty or Not?

By Teresa Ambord

Appliances rarely break down within the time covered by the extended warranty, and if they do break down, the cost to repair them is often comparable to the cost of the extended warranty. General wisdom says if the extended warranty costs more than 30% of the item itself, it’s not worth it.

Just when you thought your transaction was almost done – you carefully picked out your new washer/dryer, ordered the delivery, and presented your credit card. All the decisions are made and now you’re thinking about lunch. Then here comes another decision… “Would you like to protect your investment with an extended warranty? It’s only a few dollars more.”

Are extended warranties worth it? The opinions about this coverage are all over the map. Some consumers always buy these policies, though statistics show most extended warranties are never used. Some people reject them automatically, preferring to take their chances.

Others say they are just a waste and the only people who benefit are the ones who sell them to you. Then again, almost everyone knows someone who claims an extended warranty saved a bundle when the appliance failed. So what’s a consumer to do? Here are some points to consider before you pay extra for an extended warranty.

Appliances

Consumer Reports says that when you buy an appliance, the retailer makes a profit of about 10%. But when you add an extended warranty, the profit rises to up to 50%. Appliances rarely break down within the time covered by the extended warranty, and if they do break down, the cost to repair them is often comparable to the cost of the extended warranty. General wisdom says if the extended warranty costs more than 30% of the item itself, it’s not worth it. Also, if the breakdown is ordinary wear and tear, the warranty may not cover that repair. In general, 20% of consumers do buy the extended warranty, but the warranties are almost never worth their own cost.

Computers

It’s no secret that if you buy a low-end computer it will likely be less reliable. In this case, the cost to replace the computer may be less than the cost of the extended warranty. Regardless of the cost of the computer you buy, consider the cost of the extended warranty relative to the cost of replacing the computer itself. As noted above, if the warranty is more than 30% of the cost of the item, it is not worth it.

Smartphones

People tend to enjoy replacing their phones more frequently than most devices. If you count yourself in that group, an extended warranty isn’t likely to be used, so save your money.

The Latest Greatest New Thing

When it comes to the newest technology, keep in mind this is iffy at best. Even tech companies like Apple are famous for bugs in their new products. People who rush to buy the first new Apple phone stand a good chance of being a guinea pig. The same is true with high tech TVs.

New Cars

Edmunds.com (an online resource for automobile information, headquartered in southern California) says unequivocally that extended warranties on new cars are almost never worth the cost. These warranties come with a lot of fine print that may include such things as high deductibles. Chances are your new car will not need major repairs during the time the warranty is in effect.

As for used car warranties, the jury is out on this. Used cars of course are more likely to need unforeseen repairs.

Here is some great advice from PC World Magazine. “Financial planners recommend making your purchase using a credit card that extends the manufacturer’s warranty, and then putting the cost of the extended warranty into a repair or replacement fund. Often, by the time you need that money, you’ll probably have saved enough to replace the nonworking tech product.”

If you do decide to buy an extended warranty, find out what it covers. Most things you buy come with a warranty from the manufacturer. This may cover one year, but the time varies by the product and the manufacturer. These warranties are basically to keep you from being stuck with a lemon. Most of the time, accidental damage is not covered by an extended warranty, though some stores, like Best Buy, do cover this. If you are a person who drops his or her phone on the pavement or runs it through the wash/dry cycle, an extended warranty with accidental damage coverage was made for you.

For other products, the conventional wisdom is that if the product lasts through the time the extended warranty covers, it will last till it dies a natural death.

Credit Cards May be Your Best Extended Warranty

Just making your purchase with a certain card may extend the base manufacturer warranty. All American Express cards have an extended warranty benefit. Visa Signature cards participate in a Warranty Manager program. And Master Card offers extended warranties to holders of certain cards, like Platinum and World. This is extra coverage, but probably will not include accidental damage.

Call Your Utility Provider

Before you make a purchase, check with your local utility company to find out if they offer
service contracts on appliances like furnaces, water heaters, air conditioners, and kitchen appliances. Generally if your utility company offers these, you can buy them after you’ve made the purchase, rather than having to make that decision at the time of purchase.

The best advice overall may be to avoid brands that are most known to fail. Do your research on the products and the producers. If you are buying technology, PCWorld Magazine is a great place to find out about reliability as they do a survey to determine the best each year. Also check the general reliability of the product you are buying and whether history shows it is likely to break down within the initial warranty period.

Optional Sidebar: Voted Mostly Likely to Fail

Consumer Reports lists products each year that are most likely to fail within the first three years. Here are the items at the top of the list and the chances they may break down within that first period.

  1. Desktop PC - 37% repair rate
  2. Laptop PC - 33% repair rate
  3. Lawn tractor or riding mower - 29% repair rate
  4. Refrigerator (side-by-side with ice maker and dispenser) - 28% repair rate
  5. Self-propelled mower - 26% repair rate
  6. Washing machine - 22% repair rate
  7. Gas range - 19% repair rate
  8. Refrigerator (top-and-bottom with ice maker) - 17% repair rate
  9. Projection TV - 16% repair rate
  10. Push mower - 15% repair rate
  11. Vacuum cleaner - 13% repair rate
  12. Dishwasher - 13% repair rate
  13. Clothes dryer - 13% repair rate
  14. Microwave (over the range) - 13% repair rate

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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