Extended warranties are like gambling: sometimes you win, but usually you don’t
In Part I of this article, I introduced the argument that extended warranties, service contracts, and their kin are usually a waste of money. In this concluding article, I’ll discuss why you should avoid them — with a few notable exceptions.
Betting Against the House
When you get right down to it, warranties are a form of legalized gambling, and the odds aren’t in your favor. I mentioned in Part I that most manufactured goods are more reliable than ever; that is, they’re less likely to fail than they used to be, as long as you take care of them.
This is especially true of cars. But dealers like to push the hefty extended service contracts, since hey, you’re already spending tens of thousands of bucks, right?
According to a recent survey by Consumer Reports, it’s cheaper to dispense with automotive warranties altogether. On average, people spend $1,000 on them… and save $700 on repairs. That’s some pretty bad math right there.
So why do they bother? It turns out that people tend to overestimate the value of the financial safety net they need for a product, given existing guarantees.
You probably won’t need warranties for cars or most appliances, but there are certain items that you probably should get warranties with. Delicate high-end electronics that you can easily break come to mind, especially top-of-the-line computers. Cheap computers, not so much. They’re just not worth the cost.
Case in point: in September 2010, Yours Truly bought a laptop computer and was offered a $100 extended warranty. I didn’t bother, because the laptop cost less than $400 new, and already came with a one-year manufacturer’s warranty.
By the time that year’s up, I’ll have gotten my money’s worth out of the computer, and it’ll probably last longer than that. (Knock on wood!)
What To Look For
Now, don’t assume that all warranties are bogus; again, they’re usually just unnecessary. If you decide to get one anyway, ask yourself these questions first:
• Does the warranty duplicate existing coverage?
• Who handles the claim?
• Where will the work be done?
• Who backs it: the dealer, manufacturer, or some third party?
• What happens if the warrantor goes out of business?
• Is prior authorization required before repairs of made? (You’ll want to avoid this kind of bureaucratic nightmare).
• Can the warrantor retroactively write something out of the warranty for any reason, or otherwise deny coverage? I’ve fallen for this one personally; I once had a homeowner’s warranty, and was denied coverage three times in one year.
Just keep all the above in mind, and move carefully before you sign up for any extended warranties or service plans.