“Ok sir, would you like to protect your brand new computer with our top-of-the-line guaranteed extended warranty plan?”
“Um… Ah… what is that exactly, does it cost me much?”
“It doesn’t cost much at all sir, here is a pamphlet that illustrates the 4 different levels of protection that you can enjoy. For only $27.99 per year you can guarantee yourself our top level of protection”
“What is all of this small print at the bottom?”
“Oh that’s just detailing what the plan all covers.”
“I thought you said it covered everything?”
“Our top tier of protection covers pretty much anything sir.”
If you have purchased a product from a place like Future Shop or a vehicle from pretty much any major dealer, you have likely had a conversation like this. What you are being sold using catchy terms like “layers of protection” is an extended warranty. These products differ widely in what they cover, but the basic idea is that for a yearly fee, the place where you are buying the product will fix your purchase if it breaks or malfunctions. As with most financial products, the devil in the details, but the vast majority of the time, you should politely decline the offer.
Pros and Cons of Extended Warranties
Before we get into to discussing the specific pros and cons of extended warranties, you should know exactly why they are always pushed on you so hard – they are huge money-makers and often reward a low-paid employee with a fat commission. This gives the sales team a huge incentive to push the product. In fact, one of my buddies who worked at Staples told me that they actually make very little on a laptop computer if you simply go in and purchase one when it is on sale. They make their profit on the programs they sell with it, “setting it up” for you, and especially on the extended warranties. In other words, the classic upsell.
The extended warranty that these companies sell is in addition to the manufacturer’s warranty that is on all new vehicles (and several used ones), and almost all electronics. These warranties vary in what they actually protect, but make sure to read the fine print and get a straight answer from someone before signing on any dotted lines. I have heard about several instances where someone believes that their warranty is valid for a certain repair, only to find out that it is one of seven exclusions listed at the bottom of the pamphlet/agreement in size 4 italics. Not all extended warranties are created equal, and some actually may present decent value for people that couldn’t afford to replace their investment in a new TV or new laptop. There is little doubt however, that over a long enough time frame you will always win out by declining extended warranties.
Do You Remember Buying Warranty Three Years After The Fact?
The reason for this certainty is the fact that retailers make such a huge profit on the product. Think about it, would those businesses really be pushing products so hard if they even stood a 10% chance of losing money? Even when extended warranties are honored, the retailer can often fix the problem cheaply, and quickly (relative to if you paid for the repair) so it’s a great gamble for them. My guess is that plenty of people (a majority even?) that purchase the extended warranty throw it in a box with their receipts somewhere when they get home, and are very unlikely to ever redeem it simply because three years later you will forget you purchased the extended warranty on that laptop of yours.
Before you commit to any extended warranties make sure and check out the manufacturer’s warranty on the product you are buying. There is often a lot of overlap and while the manufacturer’s warrant is usually for a shorter time frame, it is also often more comprehensive than the one the retailer is offering. Finally, I recommend looking into a credit card that offers a decent warranty plan on all of your purchases. There are several options out there, here is our recommendation. If you already have a credit card warranty, and a manufacturer warranty, you need to seriously evaluate if paying 25%+ of the total value of the product is worth it (especially since vehicle and electronics specifically decline in value severely over the first few years).
Is It Worth It?
The only time I would ever advise anyone to say yes to the overall question of, “Is the extended warranty worth it?” is if the warranty is extremely detailed, comprehensive and easy to understand, plus you just couldn’t sleep at night knowing that your prized luxury toy was not covered for certain events. If it will make that much difference to your overall mindset than it may well be worth it. Personally, I’m secure enough in the basic knowledge that I’ll win out over the long run, to eat the short term risks. Invest/save the money you would have spent on extended warranties and you really can’t lose.
Readers, do you buy extended warranty?