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