Should I or Shouldn’t I? The Definitive Extended Warranty Litmus Test

A couple weeks ago I told you about my adventures in getting a set of four new tires for my 1997 Honda Civic and why buying extended warranties for tires is a waste of money.

Of course, the conventional wisdom out there is that it is virtually never advantageous to get an extended warranty for anything, which I believe is a bit extreme.   Experts like Dave Ramsey, for example, tell their followers to just say no to extended warranties.

Dave’s not alone.   Here’s an article from a respected British publication that implores us to avoid extended warranties at all costs.

Really?   Avoid them all costs?   Isn’t that a bit extreme?

I avoid the measles at all costs.   I’ll also avoid Taylor Swift concerts at all costs.

Yes, I realize extended warranties are usually, well, unwarranted – but to avoid them at all costs?

Isn’t that just a bit hysterical?

Extended Warranties Get Little Respect – And for Good Reasons

In a more level-headed article, Consumer Affairs notes that there are five really good reasons you shouldn’t buy an extended warranty:

1. They usually cost more than they are worth.

2. The warranty work may be unreliable.

3. The warranty may not cover what you think it does.

4. The warranty underwriter may go out of business.

5. The extended warranty may overlap the manufacturer’s warranty.

And while that’s all well and good, those criteria are still not sufficient for us to blindly assume that all extended warranties are automatically a bad deal.

Sometimes Extended Warranties Do Make Sense

Despite what guys like Dave Ramsey say, things aren’t always quite so black and white.

For example, the Honeybee and I have found that we were wise to purchase the extended warranties for some of my young son’s electronic games.   Because my son tends to be rough, he has broken more than a few of them, and as a result those extended warranties we bought have more than paid for themselves.   If I had listened to good ol’ Dave and his one-size-fits-all advice, I’d be a few hundred dollars poorer today.

Yes, extended warranties are more often than not a bad idea — unlike a surety bond — but on rare occasions they do make sense.   Miss it and you could be costing yourself money.

The trick, of course, is figuring out exactly when it’s advantageous to pull the trigger.

My Extended Warranty Litmus Test

Because a one-size-fits-all approach is a bit simplistic, I tried to devise a definitive litmus test that could be used to determine those rare occasions when an extended warranty actually makes sense.

So with that aim in mind I developed this flow chart (below) that I put into a matrix format.

Simply start at step 1 and answer the questions as best you can, continuing on until you are told whether or not an extended warranty is worth it.

Warranties1

Let’s look at some of the extended warranty litmus test questions in a bit more detail.

Question 1.   Does your extended warranty offer 24/7/365 customer care?

For a lot of people, this little service perk makes the cost of an extended warranty well worth it.   This is often especially the case for those people who lack the expertise required to make the best use of the product being purchased.   A great example of this is a computer.   Many computer neophytes may not feel comfortable unless they have the security blanket that such a policy offers, and it’s very tough to put a price on peace of mind.

Question 2.   Are the repairs already covered by the terms and period of the standard manufacturer’s warranty?

Well, are they?   If you’re not sure, ask!   While you’re at it make sure the extended warranty doesn’t overlap with the manufacturer’s standard warranty, otherwise you will be paying for a portion of the extended warranty that you don’t need.   For example, although you might pay for a three-year policy, in reality you could be getting only two years of additional coverage.

Question 3.   Does your credit card already offer extended repair and/or replacement coverage?

Credit cards unjustly continue to get a bad rap among many personal finance experts.   However, many of them offer extended repair and/or replacement coverage for certain items that completely nullify the need for an extended warranty –   just one of many good reasons why I will never cut up my credit card.

Question 4. Do you have the expertise and are you willing to fix the product yourself if it breaks?

If you have the knowledge, money, and gumption to fix the product yourself – assuming you can readily find the parts – it probably makes sense to take your chances and forgo the extended warranty.

Question 5. Are you buying a high-reliability product?

There’s a big difference in product reliability rates.   A laptop computer, for example, has a better than 2 in 5 chance of requiring repairs within the first four years.   Then again, an LCD or plasma television has only a 3% chance of breaking during the same period.     The question is, how much risk are you willing to live with?     For a list of repair rates for various products, check out this post by Consumer Reports.

Question 6. Do you expect the person using the product to treat it in a rough or careless manner?

As I explained earlier, some products simply don’t stand a good chance of survival when they’re in the hands of a klutz or otherwise careless individual – regardless of how highly reliable they are.

Question 7. Do you already have the savings available in a dedicated repair fund?

If the expected repair costs are relatively low, and you have the savings already in the bank to cover them, why bother giving the dealer more of your hard-earned money when the odds are that your product will last beyond the warranty period anyway?

Question 8. Is the product in a niche that usually sees price declines over time?

Most electronic devices tend to drop in price over time.     In those cases, it often makes sense to take your chances and pass on the warranty – especially when the drop is significant.

Question 9. Will the product be obsolete before the extended warranty period has expired?

Some products like video game systems become obsolete within a couple years.   For those items, you’re better off taking your chances. If the product does break and the cost to repair it is small , then there’s no harm in paying for the repairs out of your own pocket.   If the cost to repair is high though, you may as well replace your dinosaur with upgraded technology.

Question 10. Is the cost to replace or repair the product, or the cost of extended services, less than the cost of the extended warranty?

Be careful.   The odds are firmly against you when it comes to you having to exercise your extended warranty for even one repair.   If the cost to repair or replace the product is less than the cost of the extended warranty, then you are betting that the product you’re buying will actually require at least two repairs over the life of your extended warranty – and possible more than that.   Talk about long odds.

Question 11. Does the cost of the extended warranty exceed 20 percent of the product’s purchase price?

Consumer Reports recommends you pass on any extended warranty that is higher than 20 percent of the product’s price.

Question 12. Is the product indispensable and otherwise difficult or impossible to replace?

How do you replace the irreplaceable?   Sometimes things are tough, or even worse, impossible to replace.   Perhaps you are buying a product that is being discontinued but you know you are going to need it for the next several years.   If so, then maybe this is another one of those rare instances where an extended warranty just might be money well-spent.

In Conclusion

As you can see, most of the litmus test exit points lead toward NOT getting the extended warranty.   Then again, when all the stars and planets do come into perfect alignment, the test will show you those rare times when purchasing an extended warranty might not be such a bad idea after all.

Comments

  1. 1

    Susan Tiner says

    Great post. I buy the extended warranty for PC laptops (not Mac) because of the failure rate, and also because they usually make it convenient to send the laptop out for repair/replacement, e.g., send you a box with a suspended sling to safely ship the laptop.

  2. 2

    pinksnowsuit says

    Also, don’t buy the extended warrantee offered by the store – those are the most expensive way to go. Third party warrantees like http://www.squaretrade.com/pages/ are often far cheaper, offer better service and for a bit more can offer breakage protection. (Am I going to drop or spill coffee on my GPS in the next three years – Yes.) I wish I’d known this years ago.

  3. 3

    says

    I really like this post and the litmus test – and the fact that you say a critical word about a one-size-fits-all approach to personal finance.

    One of the big problems with extended warranties is that it is so easy to get suckered in. Just yesterday I bought new (prescription) glasses for $150 with a few add-ons like anti-scratch and such. At the end of adding on these other little improvements I was asked if I wanted a 1-year warranty for $18. Those $18 slip in so easily when I was adding $15s and $30s. I almost signed up but I caught myself fast enough. Once you say, “Yes, let’s put it on” how likely is it that you tell the sales person that you changed your mind a few seconds later, when you realize what you have done? – Not very likely, right?

    • 4

      says

      @Ctreit: I appreciate the love! It is very easy to get suckered in and, I’ll say it again – 98% of the time, the extended warranties are a sucker’s bet. I have found that often times, the salesmen can’t even explain what they are selling with respect to the details of the extended warranty. When I press them for details, most of the time they have to ask their manager – or I just get a blank stare. Always challenge the salesmen who are pushing these warranties on you.

      (For the record, Ctreit, I had to reenter your original comment after my comments database got corrupted this afternoon. Yours was the only one from this thread that I couldn’t recover. Sorry about that.)

  4. 5

    says

    Very useful chart! I certainly fall into #6, “Do you expect the person using the product to treat it in a rough or careless manner…”. It took me two new cell phones to learn my lesson and finally realize the warranty was worth it. The reason I didn’t want to do it in the first place was because, like you said, the technology becomes obsolete so quickly. But apparently I can render cell phones obsolete more quickly than the changing technology!

  5. 6

    janice says

    I paid $90 for the 5 year extended warranty on my $900 Frigidaire refrigerator. The mfg warranty expired at year 1. The icemaker went out in year 3, twice. Those repairs were almost $250 each. In year 4, the icemaker again. In year 5, the defroster. I have 5 months of year 5 left. What I learned from this is that sometimes extended warranties are worth it and Frigidaires are crap.

    • 7

      says

      Well, people do hit pay dirt on rare occasions when buying those extended warranties, Janice, as your example shows! I’m glad yours paid off for you. :-)

      Refrigerators are usually very reliable, although my experience suggests they tend to go on the fritz more often when they are moved around a lot. Personally, I would never get an extended warranty for a refrigerator unless I knew I would be moving it often. Of course, if I had bought your fridge, I would be out a lot of money right now.

      I’ll stay away from the Frigidaire refrigerators when it comes time to buy my next one. ;-)

  6. 8

    Anne says

    This is a great post. The two I run into most often are electronics and my kid sister (not a good match, they just seem to fall out of her hands and onto hard surfaces) and my dad and his smart phone (it is indispensable, I cannot fix the physical device myself, we have no back-up devices from previous contracts, and if it broke we would need a replacement as close to immediately as physically possible or else his head would explode).

  7. 10

    Nicole says

    I always panic when I have to decide whether its worht it or not to get the warranty. This really helps. Thanks.

    • 11

      says

      A lot of people get confused when they get the extended warranty sprung on them, Nicole. That is one reason why I put this little spread sheet together. Keep in mind that most places will allow you to buy the extended warranty right up to the day the manufacturer’s standard warranty expires – so there is definitely no rush! Why would they do that, you ask? Well, considering that extended warranties are such big money makers, it really shouldn’t be much of a surprise! :-)

  8. 14

    dave says

    I just bought a new lawn mower and HD offered an additional 3 year warranty for $60 AFTER the manufacturer’s 3 years ran out. So I am now covered for 6 years (I made sure it didnt overlap the manufacturer warranty). I consider that a great deal and a wise buy.
    My last lawn mower broke 4 months out of warranty, and the repair ($170) was hard to justify on a mower i originally paid $250 for.
    Based on your test, this was the right decision. Another thing to consider is the yearly cost of ownership. Doubling your warranty cuts the cost of ownership in half, but this only applies to items that will remain in service the entire time. (Video games and computers can be quickly outdated).

    • 16

      says

      I would too. I remember when I bought my last lawn mower and they gave me a similar option and I got it. I was very thankful because after 4 years it died and luckily I had the additional warranty.

  9. 17

    says

    I like your chart, great way to make a decision on a warranty. My husband and I purchased an extended warranty on our Honda 5 years ago and it still has a life of 2 more years. All in all, we probably didn’t need it, but we’re still covered in case anything goes wrong.

    I also like your point about items becoming obsolete. Many computer accessories, like flat screen monitors, are outdated within a year. (we just had this happen to us.) Our LG monitor, not even 2 years old, stopped turning on. We didn’t purchase the extended warranty, but it had a manufacturer warranty up to 3 years. We are now awaiting a refurbished one, since our model is no longer made. The Story of Stuff explains a little about how companies purposely build in obsolescence.

  10. 18

    says

    The problem with warranties, and why I never take them, is they cover the first few months or a year or two of a products life. That’s when it’s in the best working order and least likely to crap out.

    Usually, if a product fails that early in the process, you can get the company to take it back and replace it. It seems like a waste of money, I mean think about it, if the company really believed in their product and it’s integrity, why even offer a warranty, other than as an add on to make more money?

    The other issue I have is that when I have taken warranties, they’ve been not quite what we think they should be. There are exclusions for this issue and that, or they don’t cover labor, or “we can’t do that in this state”–all gotcha provisions.

    Worse than having a faulty product, is having the product but having paid for a warranty that the company won’t honor, or won’t honor in full.

    • 20

      says

      @LittleHouse: Hondas are just so reliable that I wonder if more than a small percentage ever get their money back from those extended warranties. I am a big Honda fan. We have two, in addition to the 97 Civic we have an 01 Odyssey and both are just so dependable. Of course we take meticulous care of them – they are always garaged and we keep to regular maintenance schedules. Still, it sounds like you appreciate the peace of mind and for many people its hard to put a price on that. :-)

      As for the Story of Stuff, please check out “The Story of Stuff, the Critique” at this link and let me know what you think. I think he makes a very solid case: http://www.youtube.com/watch?v=c5uJgG05xUY

      @Kevin: One of the biggest “gotchas” is a pro-rated warranty. As I demonstrated in an earlier article on my water heater – an extended warranty that is pro-rated is usually not worth it. For more on that story, here is the link:

      http://www.lenpenzo.com/blog/id819-how-i-fixed-my-water-heater-without-a-plumber-and-saved-400.html

      @Susan: For a lot of folks, laptops are probably one of the few items where it may make sense to buy an extended warranty.

  11. 21

    says

    Your next task is to list some common items and see if they fit the criteria. Like

    Plasma TV
    Dishwasher
    Computers
    Washer Dryers
    Vacuum cleaners

    that would be interesting!

    Len – looks like you are the true consumer report guru!

    • 22

      says

      Uh oh. Now I am getting homework! LOL

      That would be a cool experiment, although the answers would differ from person to person. As for me being the consumer report guru – wow that’s quite an honor, although I am not so sure I can live up to that title! The pressure from just the thought of it is already killing me. LOL

  12. 23

    says

    You do not have to review cars – but just filling your stomach (and your family members) with generic vs branded stuff is quite fun (I would assume)!!

    Plus I have to call you “the” movie critic – can’t wait for you to review “the hangover”!

  13. 24

    says

    Wow, great post Len. I agree that EW are usually a bad idea. We skip the store offered EW and contribute the asking amount to an ING Direct account labeled “Extended Warranty Fund.” This works great, but as you mentioned… there are always exceptions to the rule. Great litmus test my good man.

  14. 25

    says

    I think you hit it on the head with looking at the demographic that is using whatever the item you may put under warranty. My boys are more likely to lose anything than actually break it in most cases of which there isn’t much recourse. My sister in-law on the otherhand has done more damage to her laptop in 6 months than I can even fathom. I think secretly she’s an airline baggage handler. Now it looks like it’s a laptop that the Bird Man would use from the Road Warrior so her extended warranty has paid for itself ten times over. But it is so tiring to be contstanly upsold on things like headphones or $12 used DS cartridges.

    • 26

      says

      @Mr. CC: Good point. The Honeybee and I did see the Hangover. Hmmm. I wasn’t planning on reviewing that one, but maybe now that you mention it…
      @Pink: I never heard of that. Thanks for the tip! :-)
      @Matt: Thank you, kind sir! I do realize there are exceptions.
      @Paul: LOL I see great minds think alike! The bird man from the Road Warrior – that paints a great scene. I loved the movie. (And I bet you’ve got a homemade whirlybird in your garage too, don’t you?) ;-)

  15. 27

    says

    I agree that most of the time extended warranties are a sucker’s bet. Today for example – my wife was buying a rocking chair to use when our baby is born. The item is a couple hundred bucks, and of course the extended warranty (which I can’t imagine needing for a rocking chair) was almost 20% of the purchase price. Really?

    Some things with higher failure rates and likelihood might make sense to get a warranty, but those items are few and far between – probably about .01% of the time!

    No, I don’t want a $10 warranty on that $20 controller I bought!

    • 28

      says

      @Kimberly: LOL! You’re not alone in being able to render stuff obsolete more quickly than the changing technology! Great comment! :-)

      @Peter: How does a rocking chair break, exactly? That just goes to show how profitable these things are for those who sell them. It’s getting to the point where I won’t be surprised if they are soon going to start offering extended warranties at McDonalds:

      “Yeah, I’ll take the Big Mac value meal for $4.99.”
      “Would you like our extended warranty, sir, for only 99 cents more?”
      “What does THAT cover?”
      “Well, it currently only covers bun failure, but for $2 we will expand the coverage to the two all-beef patties, secret sauce, lettuce, cheese, pickles and onions as well. Pro-rated, of course.”

  16. 29

    says

    Do you’ve a profile on twitter? I can’t seem to come across Should I or Shouldn’t I? The Definitive Extended Warranty Litmus Test Len Penzo dot Com on the website and I would like to connect with you there. I like your writing style, thanks Jeremy Albert

  17. 31

    says

    Most of the time having extended warranty does not make sense, but there are some products that it does make sense. Example would be having extended warranty for vehicles. Even if it costs quite a bit, some people like to have peace of mind knowing their cars will be covered, and that mechanics won’t surprise them with additional charges.

  18. 33

    says

    I never go out for an extended warranty. To me it seems to overlap the manufacturers warranty. Also, if your buying some item of worth you should do research on it and know what consumers say about the quality of the product.

  19. 34

    Ken says

    Thank you for doing all of the “leg work” on EW. Your Litmus Test makes very good sense! I hardly ever purchase an EW- for many of the reasons you and other posts describe. My personal belief is that a manufacturer warranty- should be intended as a just in case something out of the ordinary happens. It is likely that mass produced products will occasionally put out a defective result. But beyond that? Any reputable company shouldn’t need the option of an EW. If they feel the need to then maybe they should create their own test to determine why. If they don’t stand behind their own product then maybe we don’t buy from them? I have gotten in to the habit of asking “why, is this not a reliable product?” I only agree to buy an EW if the company discounts the cost of the product by the cost of the EW- which doesn’t happen. Money making scheme is mostly what it seems to be to me. If a water heater is rated to last 10 years it should last reasonably close to 10 years- or they should be required to fix it- because that is what you paid for. I know, only in a perfect world. Thanks!

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