Don't Waste Your Money on Extended Warranties

August 28, 2011, By Greg Paeth 0 comments

Although most people buy extended warranties because they don’t want to gamble on whether a car, a laptop or a gas stove will perform well over time, that warranty just might be the ultimate crapshoot. No less an authority than Consumer Reports generally recommends against extended warranties on most products and more recently arrived at the same conclusion about buying extended coverage on new automobiles.

A variety of other sources that have done similar research agree that the warranties aren’t good investments because the products—including automobiles—are typically reliable enough that they won’t break down within the period of time covered by the manufacturer’s warranty or the extended warranty offered by the manufacturer or a third party. Consumer Reports said its research showed that for appliances and electronics the cost of the repair and the cost of the warranty were roughly equivalent.

Bottom line: You’re paying for something you really won’t use and therefore don’t need.

If you didn’t buy the extended warranty six years ago for $1,500 but now face a $1,500 repair bill on your Nissan, you’re about even in the equation. And if you bought the coverage six years ago, there’s no guarantee you’re going to get the kind of service that you hoped to receive.

Some companies do a good job of providing coverage. Others sell warranties that are packed with fine print that might exclude the repair you need. Still others are outright scams that are about as reliable as a retirement account with Bernie Madoff. Three extended warranty offers that arrived in my mailbox all have the scent of a scam, which leads me to believe that my recent correspondence with a Nigerian Undersecretary of Finance may have become public. Phones had been disconnected for two of the companies.

An employee of the third firm answered the phone but advised me that the company had changed its name because it had been prohibited from using the term “warranty’’ in its name. Under its new name, the company had earned an “F” from the St. Louis Better Business Bureau and the undiminished enmity of at least some of its former customers. Do some research on any company offering an extended warranty on any product, especially a car, on which the fee is typically substantial.  

If you’ve ever wondered why you can’t get out of a store without receiving a pitch for an extended warranty, there’s one simple reason: They have become dependable revenue sources because they’re rarely used. In a story published not long ago, "SmartMoney" said 100 percent of now defunct Circuit City’s operating income came from extended warranty sales. The percentage was 50 percent for Best Buy, "SmartMoney" said.

Consumer Reports, which is famous for its charts and graphs, also provided a list of products and the average repair rate for those that were three to four years old. Laptop computers topped the list at 43 percent. They were followed by side-by-side refrigerators with icemakers and ice dispensers (37 percent), riding mowers (32 percent) and lawn tractors and desktop computers (both at 31 percent).

Again, don’t rush into a decision at the checkout counter. Give it some thought, do some research and evaluate whether the product you’re buying will be problem-free for the next few years. If you’re absolutely certain that you’re going to need an extended warranty, you’re probably buying the wrong product.