Are Extended Warranties Ever a Good Deal?

Sierra Black — Mon, 09 Nov 2009 16:00:02 +0000

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.

This article is from Sierra Black of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: