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
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If paying $100 or so for an extended warranty for your new electronic gadget will help you sleep at night and avoid nightmares of a smartphone emergency or laptop catastrophe, then it's probably money well spent.

Consumers capable of putting their emotional worries aside, however, can save money by declining to buy a warranty that's rarely used and not worth the cost for most products.

"From a purely economic standpoint, it usually doesn't make sense to buy an extended warranty," says Rajiv Sinha, a marketing professor at the W.P. Carey School of Business at Arizona State University.

But consumers aren't always rational. When buying a car, iPad, phone, home or any expensive item that might break, they are willing to pay for peace of mind, says Sinha, who is currently working on a research paper about warranties.

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Existing warranties. The first thing to consider before buying an extended warranty is the warranty that comes with the new product. Shoppers should check what's covered under a free warranty, which typically lasts for 12 months, before buying an extended warranty.

How you pay for the product can matter. Buying with a credit card can extend the manufacturer's warranty, though paying for part of the purchase with a gift card or cash could void the extension.

Normal wear and tear is usually covered, but dropping an iPad, for example, may not be. The owner may be required to maintain the product to the manufacturer's guidelines, such as proper maintenance or cleaning, and not storing it under damaging conditions, according to the Service Contract Industry Council. About 80 percent of all extended warranties in the U.S. are offered by the trade association's members, according to the SCIC.

A store's return policy may also allow returns within 30 days, giving shoppers an easy return option if the item breaks shortly after purchase.

Costs vs. reliability. Paying $100 for an extended warranty on a $600 laptop doesn't make sense because laptops are very reliable, Sinha says. Besides, you may want to splurge on a new one in a few years anyway when a cheaper, faster model is available.

Paying for a simple repair could be cheaper than buying an extended warranty.

If a warranty is more than 20 percent of the product's price, it may be too much. According to the SCIC, most extended warranties are 10 to 20 percent of the sales price.

For Bryan Finnerty, co-founder and CEO of ProtectCELL, which sells extended warranties for phones and tablets, if the warranty price nears half the cost of the product's retail price, then shoppers should probably pass on it.

The yearlong warranties that Apple offers cover most problems, but glitches, hang-ups and other issues its technicians can't replicate aren't usually included, Finnerty says. Apple Care warranties don't cover the theft of a device, he says, but ProtectCELL does.

Check if there's a deductible for repairs — ProtectCELL charges $50 to $150 in deductibles to repair tablets — and verify that the warranty can be transferred if you sell the product to someone else.

A good warranty on an electronic gadget should cover drops and spills — two of the most common causes of damage or destruction. But it should also cover other "accidents" that may happen from time to time.

"We've heard stories of people saying, 'My spouse threw my phone at me, and this is what's left of it,'" Finnerty says, adding that his company covers such tosses.

When you shouldn't buy. Most expensive consumer products — refrigerators, washing machines, big-screen TVs and stereos, for example — are reliable and don't break down often, Sinha says. And if they do, it usually happens within the original warranty window.

People who buy extended warranties for refrigerators, which Sinha says rarely fail, are giving in to their emotional side. The 40 percent of refrigerator buyers who purchase an extended warranty aren't buying an insurance policy because they think the refrigerator will fail, they are buying one because they would feel foolish if the fridge breaks and they were left without coverage, he says.