Whether you’re purchasing consumer electronics, appliances, or even a new car, someone is probably going to try to sell you an extended warranty. These warranties often seem like great deals, but looks can be deceiving.
Extended warranties are a booming business for one reason: They make money for the companies that sell them. That’s why it’s so important to crunch the numbers before purchasing any type of extended warranty. In many cases, you’ll be better off just putting that money in a savings account.
The Economics of Extended Warranties
Companies that sell extended warranties are in the business of making money. Some estimates put the yearly revenues of the extended warranty industry at over $25 billion. Since those revenues are built on the backs of warranties and service contracts that failed to pay out as much as consumers put into them, it’s pretty clear that buying an extended warranty is a losing proposition. There are some circumstances where it makes some sense to buy one, but you’re usually better off skipping the extended warranty and saving the money.
Examine the Warranty
Some big ticket purchases are incredibly expensive to repair, which can make an extended warranty seem like an attractive option. However, it’s vital to look at the factory warranty before pulling the trigger. A lot of consumer electronics and appliances have generous factory warranties that cover any problems that an item might develop early on. Statistics show that if an item is going to need repairs, it will typically fail within the time period allotted by the factory warranty.
It’s also vital to determine whether or not an extended warranty actually provides coverage that the factory warranty doesn’t already offer. This is especially important if you’re in the market for a new car because OEM factory warranties are usually quite comprehensive. Some automakers offer up to 10 years of coverage on vital powertrain components, and others provide free service for a specific amount of time.
Look at the Failure Rates
Different items have varying failure rates, so it’s a good idea to look at some hard numbers before paying for an extended warranty. Some major appliances and consumer electronics have remarkably low failure rates, but extended warranty companies are more than happy to sell you coverage that you’ll probably never need. According to Consumer Reports, only 10 percent of all dishwashers ever require service, and digital cameras are similarly unlikely to fail. The failure rates of most other consumer electronics are even lower.
Computers are more likely to break down at some point, but about 70 percent of them survive without ever requiring significant repairs. You’ll typically be better off saving the money you would have paid for the extended warranty because it will probably be time for an upgrade by the time your computer fails. At that point, you’ll be able to dip into your savings account and apply that money toward your next purchase.
The Cost of Self-insuring
The basic concept of extended warranty coverage is sound. Repairs are often costly, and it can be tough to fit an expensive repair bill into an already strapped budget. However, you’re typically better off skipping the extended warranty and self-insuring. If you take the money you would have paid for the warranty and put it in a savings account, you’ll enjoy multiple benefits. The money will earn interest, and it will be available if you ever need to pay for repairs. It will also be available if the item you purchase never needs repairs, which isn’t the case with extended warranty coverage. If you pay for a warranty and never need it, that money is gone forever.
Extended warranty companies operate just like insurance companies. Some of the warranties they sell actually pay off for consumers, but the majority don’t. As a single consumer, you don’t enjoy that protection. However, there is a way you can turn the odds in your favor. Every time you have the option to purchase an extended warranty, you can put the money into a dedicated savings account. Since it’s highly unlikely more than a few of the items will actually break, you should always have more than enough to cover repair costs.