When You Should (and Shouldn't) Buy an Extended Warranty

Before spending on an extended warranty, you should consider the reliability of the product and the terms of its manufacturer’s warranty.

Couple in electronics store buying laptop

"They're buying a policy to insure them against their own guilt in case the product fails," Sinha says.

[Read: 6 Reasons Why You Should Never Purchase an Extended Warranty.]

In other words, consumers aren't buying extended warranties for such products because they think they'll break, but because they'll feel bad if they do break and they didn't buy the warranty. You wouldn't expect a washing machine to fail, he says, but if it breaks after a year, you'll have wished you bought the warranty.

When you should buy. Previously owned products, such as used cars, can be some of the best things to buy extended warranties for, Sinha says. "The bad products drive out the good products" when it comes to used cars, he says. By this he means there are a lot of bad used cars for sale while owners of good used cars opt to keep them. With the increased risk involved for used car shoppers, getting an extended warranty is usually a smart financial move.

A home warranty can be a good purchase, especially if it's for an older home that has dated appliances. It can also pay to buy extended warranties for specific items added to a home.

Margaret King bought the lifetime warranty from Home Depot for all 26 windows of her Philadelphia town house when she replaced them 10 years ago. The warranty was part of the window cost, which was about 20 percent more than equivalent windows with no warranty, King says.

She's used the warranty about six times to replace windows. Without the warranty, she would have had to pay about $500 in replacement costs out of pocket. "It's quite refreshing to pick up the phone, not your checkbook, to correct any problems — from stains to breakage to track issues," King says.

The price of a home warranty can equal or exceed its cost in repairs, but that still doesn't make it worthwhile to some people. Tyler Gray, a financial advisor in Tulsa, Okla., says he recommends that clients put the money in a savings account to pay for repairs instead of buying a home warranty.

The home warranty that came with Gray's house expired just before the water heater broke, requiring him to buy a new water heater. But the experience didn't convince him to buy a home warranty, he says, because the warranty would have cost just as much as the heater.

"With that said, if something else breaks down in the next 11 months, I'm sure I'll be wishing I would have spent the money since I would have come out ahead," Gray says.

[Read: 3 Cases Where Spending Less Can Backfire.]

Regret avoidance was a strong motivator for Jeff Kerr of Denver. After spending about $500 every three to four months on repairs to his 2005 Mini Cooper S, he discovered that the car wasn't reliable and had recurring issues.

So when Kerr recently bought a new Subaru Impreza Sport Limited hatchback, he gladly added the seven-year, 100,000-mile extended warranty for $1,400. It gave him peace of mind for the next 100,000 miles, says Kerr, who doesn't regret buying the warranty.

Alternatives. Most extended warranties are offered by retailers when a product is sold, requiring consumers to make a quick decision about whether they want one. But it's not a decision that necessarily has to be made at the checkout counter.

A new car owner can wait until just before a warranty expires — at 12,000 miles or two years, for example. ProtectCELL, which sells protection plans for tablets and phones, allows new customers to buy a warranty within 30 days to a year of getting their device.

Instead of buying an extended warranty, it can be more worthwhile to put the money that would have been spent on the warranty in an account that can be used to pay for repairs or to buy a new product when the existing one breaks.

Before you make a call on the warranty question, it can pay huge dividends to research how good the product you're buying is. "If you know you're buying a reliable product, I don't see any reason" to buy an extended warranty, Sinha says. If you're armed with the right information, the decision becomes much easier.