It goes without saying that you want to get as much value as possible out of every purchase you make. A common myth amongst consumers is that one way to get more value is to buy an extended warranty on major purchases, such as laptop computers, refrigerators, or other electronic devices and large appliances.
Personally, I cannot think of one instance where purchasing an extended warranty is a good idea. There are simply too many downsides to make them worth the money, and furthermore, there are other forms of purchase protection that offer sufficient peace of mind.
Here are six of the main reasons why it doesn't make sense for you to purchase an extended warranty for your items:
1. The Manufacturer's Warranty Is Often Sufficient
Just about all products on the market today come with a standard manufacturer's warranty, which typically covers your purchase for one year. The majority of minor malfunctions occur within this first year, while major problems are more apt to occur much later, beyond the reach of an extended warranty's term.
2. Extended Warranties Are Not Always Effective
You may think that an extended warranty will cover anything that goes wrong with your purchase, but sometimes this is not true. Extended warranties are typically rife with exclusions and fine print. If you still want to purchase one for peace of mind, from a third party provider such as SquareTrade for example, be sure to read the terms and conditions first to make sure it offers adequate protection.
3. Consumer Products Depreciate in Value
Suppose you purchase a Blu-ray DVD player for $100, and acquire a two-year extended warranty for an additional $30. Chances are, within the next couple of years, the price of Blu-ray players will drop significantly. In other words, you're probably better off keeping the $30 in your pocket and just getting a new one should something happen to yours.
4. The Necessity of Repairs Is Rare
Consumer Reports has done studies on repair rates for a variety of small electronics and home appliances, and the percentages range from 5 to 37 percent, which generally indicates that you're unlikely to need a repair. Considering this, it often makes more sense to save the money on an extended warranty and put it toward a repair instead, on the off-chance you'll need one.
5. Warranties Are Not Cost-Effective
Another reason not to take the bait on extended warranties is that they are simply too expensive. For instance, I recently purchased a 2009 Toyota Corolla. The salesperson was pushing hard for the extended car warranty, which would offer bumper-to-bumper coverage for the first 12 months, at a cost of $1,800. I seriously doubt that I am going to need $1,800 worth of repairs in the next year for a car that is barely two years old.
Furthermore, as previously stated, the extended warranty often overlaps the manufacturer's protection. You may purchase a two-year extended warranty, but with the manufacturer's protection covering the first year, you end up paying a two-year rate for only one additional year of coverage.
6. Credit Cards Can Offer Better Protection
Certain cash-back rewards credit cards actually offer to double the length of the manufacturer's warranty, free of charge. This alone should give you more than enough coverage.
If you're considering an extended warranty, determine whether or not you can afford to pay for a major repair or replacement out-of-pocket. If the answer is yes, and especially if you don't rely on the device for income, avoiding the extended warranty is probably your best bet. But if you're the type that will sleep easier with the additional peace of mind an extended warranty affords, purchasing one could be worth the price. However, remember that such warranties may not be as comprehensive as you think. Fully investigate all aspects of the warranty coverage before making your final decision.
What are your thoughts on extended warranties?
David Bakke is financial contributor for Money Crashers Personal Finance. He reviews popular products and tools and gives useful tips for saving money.