The conventional wisdom out there is that it’s virtually never advantageous to get an extended warranty for anything, which I believe is a bit extreme. I remember an old article in Consumer Reports that said, as a general rule of thumb, extended warranties should be avoided because:
- They usually cost more than they’re worth
- The repairs are often unreliable
- They may exclude critical components
- The underwriter can go out of business
- They often overlap the manufacturer’s warranty
And while that’s all well and good, those criteria aren’t sufficient for us to blindly assume that all extended warranties are automatically a bad deal; things aren’t always quite so black and white.
The truth is, sometimes extended warranties do make sense. For instance, when my son was young, I purchased the extended warranties for some of his electronic games because he was rough with his toys. In fact, he ended up breaking several of them; as a result, those extended warranties more than paid for themselves.
That being said, I agree that extended warranties are more often than not a bad idea. It’s just that on those rare occasions when they actually do make sense – if you miss that opportunity, you could cost yourself money.
The trick, of course, is figuring out exactly when it is advantageous to pull the trigger.
With that in mind, many years ago I actually developed the following flow diagram to determine whether or not it makes sense to buy an extended warranty – and I still use it today. Here’s how it works: Simply start at Step 1 and then continue answering questions until a verdict is reached. Easy peasy!
Now let’s look at the questions in a bit more detail:
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. After all, it’s tough to put a price on peace of mind.
2. Are repairs covered by the terms and period of the standard manufacturer’s warranty?
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.
3. Does your credit card 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 or replacement coverage for certain items that completely nullify the need for an extended warranty; that’s just one of many good reasons why I’ll never cut up my credit card!
4. 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.
5. Are you buying a high-reliability product?
There’s a big difference in product reliability rates. The question is: How much risk are you willing to live with?
6. Do you expect the user to treat the product in a rough or careless manner?
Even the most reliable products can fail when they’re in the hands of a careless individual.
7. Do you have a dedicated repair fund?
If the expected repair costs are relatively low, and you have the savings already in the bank to cover them, then why pay extra when the odds are that your product will last beyond the warranty period anyway?
8. Is the product in a niche that experiences 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.
9. Will the product be obsolete before the extended warranty period has expired?
You’re better off taking your chances for products with rapid obsolescence rates such as video game systems. If they break, pay for the repairs if the cost is minor; otherwise, you may as well replace your dinosaur with better technology.
10. Is the repair/replace cost less than the extended warranty price?
Be careful; 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 possibly more than that.
11. Does the cost of the extended warranty exceed 20% of the product’s purchase price?
Many experts, including Consumer Reports, recommend you avoid any extended warranty if it costs more than 20% of the product’s price.
12. Is the product indispensable, or difficult to replace?
How do you replace the irreplaceable? Perhaps you’re buying a product that’s being discontinued but you know you are going to need it for the next several years. If so, then this could one of those rare instances where an extended warranty is money well-spent.
The Bottom Line
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 alignment, the test will also show you those rare times when purchasing an extended warranty might not be such a bad idea after all.
Photo Credit: trenttsd
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.
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?
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.
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).
I always panic when I have to decide whether its worht it or not to get the warranty. This really helps. Thanks.
Great post. You did a real good job covering all the angles.
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).
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.
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.
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.
Very thorough and informative post! Great reference for future decisions on warranties.
Thanks!
Your next task is to list some common items and see if they fit the criteria. Like
Dishwasher
Computers
Washer Dryers
Vacuum cleaners
that would be interesting!
Len – looks like you are the true consumer report guru!
Also, don’t buy the extended warrantee offered by the store – those are the most expensive way to go. Third party warrantees 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.
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 a special bank 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.
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.
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!
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!
Extended warranties are sometimes not neccessary as it often crosses over the manufacturers warranties and can also be put on your house insurance at no extra cost.
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.
I definitely believe in extended warranties. I’ve been screwed over more times than I can count on two hands, so I don’t mind paying a little extra to prevent all of that. Just my two cents..
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.
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!
Great post, I also believe in extended warranties. This is really a great reference for us to use it for future decisions on warranties.