Are Extended Warranties Ever a Good Deal?

by Sierra Black on 9 November 2009 26 comments

Extended warranties are everywhere. Every time you buy a car, a house, a computer, a cell phone or pretty much any appliance, you'll be offered a chance to purchase an extended warranty on it. A few years ago, my husband came home with a new toaster — and a warranty contract for it.

Are these warranty contracts ever a good deal? They shouldn't be. To make a profit, the private companies that offer these things need to take in more money than they pay out in warranty claims. And they do make money. The profit margin on extended warranties is reputed to be between 40 percent and 80 percent. Anyone buying an extended warranty is betting against the house.

I've never bought a lottery ticket, but I do often buy extended warranties. Why? Because I am brutal on my possessions. I drop them, I spill things on them, I crash them into things. I also have two small kids and a teenage boy in my household, who are no gentler than I am. I bought an Apple Care contract on my last laptop, and used it for numerous phone support calls, two mail-in repairs, and two complete replacements of the machine. Apple Care is notorious for being unquestioning in their acceptance of warranty repairs: most contracts won't cover something that has obviously gone dancing with a two-year-old or been run over by a car.

When I posted about buying an extended warranty for my new-to-me car, a few people suggested I'd broken one of the first rules of car purchasing: never buy the extended warranty. I wanted the warranty because I'm just getting out of debt, and don't have a lot of savings put aside. The thought of facing a large repair bill while paying off a car loan was more than I could stomach. Will I get my money's worth out of it? I hope not, because that would mean my car needs no major repairs in the next five years. If I don't, I won't buy one on my next car. By then I expect to have enough cash savings to cover any repairs that might come up.

So should you ever buy an extended warranty? The experts say no. Consumer Affairs outlines five good reasons not to. Here's one good reason to consider bucking that wisdom: you might know something they don't. I would consider buying an extended warranty if:

  • I was insuring something I needed to have ready access to. If you rely on your car to get to work, for example, and don't have sufficient savings to pay for a major repair, a warranty might be an insurance policy against lost income while your car was broken down, as well as covering the expensive repair.
     
  • I knew I would be extremely hard on my purchase. For example, I knew when I bought my laptop that I had a toddler and was about to have another baby. I could reasonably expect the laptop to fall victim to an accident during the three years the warranty covered.
     
  • I was buying something for someone else. My mother gave me a suite of children's bedroom furniture when I had my first child, and it came with a warranty against breakage or stains. It may not have been a good deal, but it was part of the gift: she gave me furniture and the freedom to not worry about the kids breaking a drawer or spilling milk on the rocking chair.

Probably, even if you think you're gaming the system, you'll lose. After all, these companies do make a profit, and no one buys a warranty expecting to lose money on it. But if you really do have a special case, like my "laptop vs. toddler" situation, a warranty might be a good bet for you. It's still a gamble though, and putting that money in the bank will never steer you wrong.

 

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Guest's picture
Wil

It may be practical in this situation, but probably not many. I haven't bought one in quite some time. I'd rather put the cost of an extended warranty in my "lemon fund" and self warranty. If the item fails, I only have to argue with myself. If it doesn't, I'm dollars ahead.

Sierra Black's picture

Totally. Building up a fund to cover repairs or other problems is a much better solution in almost all cases.

Sierra Black - embracing the wild heart of parenting at www.childwild.com

Guest's picture
Beth

I bought an extended warranty on a laptop when I was in grad school because I couldn't afford to replace it if it died. Sure enough, a $700 part busted right before the warranty was up.

I realize that rarely happens, but the warranty also bought me a few years to replace the computer -- meaning I can now buy something cheaper with more power.

Still, I'd only get the warranty on "can't live without" items like a laptop.

Guest's picture
Guest

Consumer Reports has done a few studies of the worth of extended warranties. When LCD tvs first came out, they recommended an extended warranty, saying that the technology was unknown enough to warrant it. Now they no longer recommend that.

I bought the extended warranty on my laptop when I was in law school, because I knew the typical situation for a laptop does not imagine that you carry it on your back to school in a backpack, and then move it from room to room 4-5 times a day. It was just barely worth it--I probably got $200-$300 in repairs done on it, including a motherboard replacement--and that was probably about the cost of the additional warranty.

Now I would not do that, because I could spare the $1000 to self-insure and replace the laptop if it failed. At that the time, being without the laptop would have been a serious inconvenience and I could not have easily afforded a replacement. I also knew I was going to use the warranty, and I did. Still I'm not sure if it was the best decision.

The general rule seems to be, don't insure if you can safely self-insure. For consumer goods, the most you can be out is the cost of the purchase. How many goods should we be buying that we can't afford to replace outright if they fail in a typical 1-3 years window? A car and a house are about it. I insure my home (renters insurance) and my car, and I make sure to buy liability coverage to cover possible costs beyond replacement costs. If you can't afford to replace your laptop, you may have to question whether you can really afford to buy it in the first place.

Guest's picture

Extended warranties are offered for a reason. It's a way for companies to make money. Somebody has calulated the risk of possible failures and assigned a dollar figure to cover the risk. Just like a casino, extended warranty companies are not in business because the pay their customers.

Their is no such thing as bumper to bumper coverage either, the fine print is stategecally written by skilled lawyers who sole purpose is to create loop holes for the company to get out of paying on a claim.

Not to mention most items come with a manufacturers warranty, and dealing directly with the manufacturer will usually get better results anyway.

Just my two cents

Guest's picture
Craig

On higher priced items I believe they are. I got the extended warranty for my computer just in case.

Guest's picture
Tony

Any Apple product: it makes sense to buy the extended warranty. Their stuff is great, but when something does go afoul they replace/fix it no questions asked as long as you have AppleCare. Plus, they give you until the original warranty expires to buy the AppleCare. I fully plan on buying one for my iphone (bought in happier economic times) the day before the warranty expires.

Guest's picture

I totally agree with Tony. We usually don't buy warranties for our electronics, but when we bought a $1K Macbook for our son, who's harder on his possessions than anyone I've ever known, it turned out to be a huge money-saver. During the 3 years of the warranty, he had that laptop in for repair any number of times, just from "using" it the way he does. They happily fixed it every time at no cost and usually within 48 hours. They often upgraded the OS software, too, while they had it open. I would definitely do that again if we were to buy him another Apple product.

Guest's picture

Sometimes it is worth it to buy the extended warranty. I purchased a new SUV 6 years ago, financed it at 0% for 5 years and took a 7 year warranty.

Use it a few times, Still have a year and an half left on the warranty and am driving a Paid-Off car! Feels pretty lucky to me. The warranty was $2100 at the time I purchased it.

John DeFlumeri Jr.

Guest's picture
Seth

No.

Guest's picture
Guest

If I'm buying something that costs more than lets say
$300.00 I will buy an extended warranty for it.
However, I won't buy it from the store or site I bought
it from. Square trade warranty in most cases is alot cheaper.
The people I've known who have had to use it don't
have any complaints. I haven't had to use mine yet
and I hope I dont.

Guest's picture

If you get joy from gambling then an extended warranty might be interesting to you. Otherwise you have to take a big picture view. If you purchased every available extended warranty you would lose big, so why buy 1?

Face it, these insurance companies would not be selling the warranties if they didn't bring in more than they pay out... think about that.

If you are in debt and don't have the money to replace a product, then maybe you shouldn't be buying it in the first place.

It's possible to get decent used laptops and pre-owned cars, both would save you a ton and if they failed you would still have plenty for a replacement in comparison to new.

Guest's picture
Guest

If it contains a hard drive, I buy an extended warranty, otherwise no.

Guest's picture
David

A little background on AppleCare from the Terms and Conditions:

"Limitations. The Plan does not cover:

(ii) Damage to the Covered Equipment caused by accident, abuse, neglect, misuse (including faulty
installation, repair, or maintenance by anyone other than Apple or an Apple Authorized Service
Provider), unauthorized modification, extreme environment (including extreme temperature or
humidity), extreme physical or electrical stress or interference, fluctuation or surgpower, lightning, static electricity, fire, acts of God or other external causes;

(vii) Covered Equipment that has been lost or stolen. This Plan only covers Covered Equipment that
is returned to Apple in its entirety;

(xi) Defects caused by normal wear and tear or otherwise due to normal aging of the product;"

They also don't cover data. If your drive dies, they won't save it.

Basically, if you drop it, break it, spill anything on it, or otherwise cause the harm - you will be billed before its fixed. Techs / Geniuses are expected to inspect the hardware for damage. AppleCare isn't a save-all, its a 2 year extension to Apple's free 1 year warranty.

Guest's picture
Q

I appreciated this post and all the comments; making this decision is the toughest part of any major purchase for me.

I too bought AppleCare for my laptop when I was in grad school. I had the money for the plan when I bought the laptop, and correctly assumed that I would not have the money for a major repair later. I was disappointed with the limitations of AppleCare - they replaced my hard drive, but recovering my data (a semester's worth of notes and half a paper) cost over $200; when my battery refused to hold a charge for more than 5 minutes, this was excluded also.

I bought a used Land Rover that I was able to get an excellent deal on, fleet car with low miles. I loved the car but was so worried about the reputation for being troublesome. A 5 year extended warranty was pricey, but the total price for car + warranty was less than I would have spent on a new Jeep or Toyota. The car is now paid off and has 2.5 years of warranty left, which is a nice comfort. However, my next car purchase I will be more practical and not sink that kind of money into a car I expected trouble from!

When I bought a Samsung LCD TV, I declined the warranty. The thing caught fire the first time I turned it on. I feel like with electronics, if it's going to fail, it's going to fail immediately, and can be returned under typical store warranty.

The one that I am still undecided about was a new GE front load washer. We wound up getting the warranty at the last minute because the salesperson said we could use it for a service call/cleaning at the end of the first year and then cancel and get our money back. I still felt suckered, but dangit if the thing didn't blow a hose last month! Sure, I got my money's worth out of the extended warranty, but that does little to make up for the fact that a $750 washer had a serious (completely non-functioning!) problem after only 3 months!

Guest's picture
Whatido

My wife and I own (outright) two cars.

We bought an extended warranty on one. I'm glad we did -- we have already broken even on the cost of the warranty and we still have two more years on the five year warranty.

We didn't buy an extended warranty on the other car. I'm glad we didn't -- we haven't spent a cent on anything other than gas and maintenance in the eight years we have owned it.

One car was manufactured Toyota and the other was manufactured by Chrysler. I expect you can determine which one hasn't given us a dollar of trouble.

My point is, warranties CAN be good and they CAN be wasteful. It generally depends on the quality of the product that you are purchasing.

Guest's picture
Misty

We bought the extended warranty for my 06 Honda Civic when we bought it new. I have put about 55,000 miles on it and recently had to put it in the shop for repairs. We discovered the issue when I took it in for an oil change, apparently some place that I had gone to punctured the CV boot causing oil to leak and damage the axil. We had to pay total of $600 but this included 2 fluid flushes that are not covered by warranty. I asked how much it would have cost and the estimate is upwards of $1,500. We still have app. 45,000 miles to go and have put this amount to the extended warranty. As my husband is not handy with cars, it makes sense for us to get the warranty.

Guest's picture
berbuck

Why wouldn't want to buy an extended warranty? I'd say fior most electrical items it's simply a must.

Guest's picture
mx

Extended warranties are primarily a gamble of perceived convenience. Warranty providers must turn a profit, in addition to the profit margin the dealers make, meaning that they're betting that a product will not break in a way they will need to cover often enough for them to lose money. And you're betting that they're wrong. And if they're consistently wrong their business isn't apt to last for long (ditto with your coverage).

Now the Warranty company bases their bets a strong study of statistical failures and costs, and they limit warranties in ways that limit their liability (to pay out). And we make our bets based mostly on perception, often in the emotional moments of purchase. "Oh, what the heck! I'll get the extra protection. I'm worth it!" Hardly a statistical measure. And anecdotally we can prove our case, as we know someone needed (or have ourselves) the extended coverage. Of course anecdote is a small statistical measure, so we're really hoping that it pays off.

Not that it isn't possible to luck out and have something fail (and be covered), but this is hardly a win. When a product fails we lose, and when you buy the warranty we lose if it doesn't fail. Statistically speaking, we would be better off to bank the money we would spend on warranties, drawing from it when something really fails. You would want to combine that with good product research (avoid cruddy products), keeping an eye out for warranties that actually provide value (where they may be offered at a loss to gain customer appreciation).

FWIW, I think Apple's warranty program must be partly run as a way to build a loyal customer base, as they allow customers to buy it anytime in the first year (often when hardware fails). For laptops, I know dozens of users who have used their Apple Care to their benefit. Anecdotal, but interesting nonetheless.

Now car warranties may sometimes provide a separate value (separate to repair or accident coverage): selling a car with a warrantee may increase the car's value. Do the math, and if you come out ahead consider it as a dual-purpose purchase.

But with warranties, BUYER BEWARE! Most of the time the house will win, and we'll be stuck using our emotions to make a gamble against the house's larger body of fact, putting us at a clear disadvantage.

Guest's picture
mfd

I wrote an article about looking closer at extended warranties. In general I'm not a big fan of extended warranties but I do think its silly to just blindly turn them all down. I think every warranty should be judged on its own merits before making your decision.

Guest's picture
Guest

I wrote a long note and it just went "poof" to wherever notes go at times.

I just can't replace that note (probably hiding somewhere here). I was wondering about buying insurance for about $160/one time/two years/$1,000.

I found a refurbished HP laptop, beautiful thing with lots of speed and that needful keypad. It cost a bit over $850 (worth over $2,000). I can pay the 2 years and save the rest IF I need repairs out there one day (hope not at all).

I checked the HP insurance, and it's too expensive and doesn't cover the most common problems one expects although you just never know what will happen. My old Dell has been great for over a decade and now it's the base for my home LAN that I just set up.

I don't travel with this laptop so it's just here on my desk in a safe place. I just feel very fortunate to have found such a beautiful machine for about 70% off. It appears all new, and it might have been (if it was in overstock like so many dealers do) OR they just do this awesome work to restore to like new. I get digital cameras the same way...usually off eBay. I do 95% of buying online and I save a LOT of money. (I was born during the Great Depression so that tells it all.)

Also, on the notes regarding Blue I did not want to go to the Blue place to buy for some reason. Ditto Circuit City. I knew I'd regret it.

Thanks for any suggestions! Neat blog here.

Guest's picture
Guest

We had an extended warranty on our diesel vehicle. Cost $2100. First year the 6 CD/stereo broke and it cost us $50 to repair. Ford cost, $500. Year 5, a little oil leak on the engine (found during an oil change) required a new bed plate. Cost to us $50. Cost to Ford, $1800. I figure that we pretty much broke even, but I am so glad we didn't have to come up with almost $2000 for the one repair.

Guest's picture
Guest

I work for a company that often sells what amounts to an extended warranty on their products. For the company, profits on the plans are just not that much overall. For us, the value is really in having fewer upset and unruly customers to deal with and to get them to come back in.

You may not think that having fewer upset and unruly customers isn't that big of a deal, but it is actually pretty big. One, then they will have a better view and opinion of us. Two, they'll be more loyal if we've taken care of them. Three, if the employees don't have to deal with as many upset customers and can actually help them, then it is a much better work environment and they are better able to actually do their job.

Obviously, the extended warranties aren't always a great deal and some places within a national corporation may be worse than others, but there are often things in the warranty that customers can take advantage of even if nothing goes wrong with their product.

So, do yourself a favor and find out what benefits the warranty has for you and figure out if you can take advantage of them or not.

Guest's picture
mcshaun

Be wary when buying the new car extended warranty as there are many people making lots of money selling inferior products. If you try to save money here, you will later find that the extended warranty proves to be more trouble to you than it’s worth.

Guest's picture
Guest

I don't get why everyone uses the "the company makes good profit from the warranty" statement as an argument against buying warranties. You realize everything you buy is being sold to you with pretty significant profit for the business right? That's pretty much how a business works. Buying medicine makes the drug companies money but still does good for you and just because a store makes money selling a warranty doesn't mean you shouldn't buy it. You should judge your purchase on how you long you want your product to last and how you intend to use it and if the warranty is reasonable and covers accidental damage.

Guest's picture

I think it really just depends on the product and you as a person. An auto warranty makes sense for those with a new-to-them car that is beyond the manufacturer's warranty, but may not be a priority for someone with a new car.