It seems like there is an extended warranty for just about anything today. Purchase a new television, appliance or electronic item and the person working the checkout line always seems to ask the question, “Would you like the extended warranty?”
Extended warranties, which are also sometimes called a service agreement or maintenance agreement, are an extension to the standard warranty that comes with a lot of consumer items. This longer warranty period might be through the retail store or manufacturer and almost always comes with an added price.
Although it might sound like a good idea to purchase the extended warranty on something like a television or even an automobile, is it really ever a good deal?
Why do businesses offer extended warranties?
When it comes to deciding if buying an extended warranty is ever really worth the cost you need to ask yourself a few questions.
- Why would a company offer an extension on the warranty for the things they sell?
- Are the products or services this business is selling that inferior in quality where the initial warranty is not good enough?
- Is this item going to break and no longer work shortly after I get it?
The primary answer to the questions above is money. Retailers and additional businesses like to offer extended warranties to make up the difference in the money they are giving away in discounts and trying to remain competitive with their prices. Also, selling extended warranties can be added revenue equaling larger profits.
Yes, there are people that do save money by buying an extended warranty, but there are many more consumers that do not. The extended warranty business is estimated to be around $40 billion dollars, according to Warranty Week.
Companies do not offer extended warranties to be nice or sell them in the best interest of actually helping the consumer. These warranties are sold by companies because they can be a big profit. Retail electronics alone it is estimated that extending a warranty can cost between 20%-30% of the purchase price. Furthermore, researchers have found that consumers purchase an extended warranty on electronics at least 20% of the time.
If selling extended warranties was not something profitable and companies lost money on them, do you really think they would sell the option to buy one?
Should you buy extended warranties?
Even though companies sell warranties mainly for adding to the profit of their bottom line, does it ever make sense to buy one? The answer is generally no. Just building an emergency fund is usually a much better way to handle situations that come up when something breaks after the initial warranty period.
The reason for not buying extended warranties is not just for the price. Although the cost of purchasing extra protection on the things we buy doesn’t typically make sense, actually being able to make a claim on a warranty can also be much more challenging than the sales associate explains when they sell a warranty.
Other factors to consider with purchasing extended warranties are the odds of an item needing the warranty and also whether the item you are buying is already sufficiently covered for a good period of time.
Read the small fine print on the extended warranty
One of the biggest reasons I personally do not like extended warranties is the small print tricks they use to not honor an extended warranty. When you purchase an extended warranty, it is similar to buying any other type of insurance. The company responsible for the claim will look for just about any way to get out of it if there is an issue.
The fine print in an extended warranty agreement can make it almost worthless if you do not follow the rules setup. A good example of this can be with something like an Air Conditioning system. You might have an extended warranty, but in the fine print, you might see that it is mandatory to have a yearly service done to comply with the warranty. It’s not just extended warranties that have fine print, but also original warranty agreements. The manufacturers and businesses will look for ways to get out of them.
I purchased a shed from a popular company for my backyard and it came with a 10-year warranty. However, reading the small print requires the shed to be repainted after 5 years to keep with the warranty.
Vehicle extended warranties can also be a big one that the warranty company can try to get out of or at least take a long time to correct the problem. They may require a specific repair shop or only do repairs with after-market parts, which could be a good or bad thing.
When it comes to an extended warranty with electronics don’t be surprised if the fine print of the warranty only covers you for a refurbished or lesser item as well. This can allow the manufacturer or retailer to minimize their cost under an extended warranty and retain as much profit as they can.
Extended warranties almost always have fine print they rely on to deny coverage and this is why they are a popular complaint for the Better Business Bureau and the Federal Trade Commission. I have always had a big issue with small print advertising and it being borderline deceptive. Here is a previous article I even wrote on the subject Fine Print Advertising – Is it Deceptive and Misleading?
It’s not just the small print with service issues on extended warranties
Although it is often likely that a store or manufacturer will immediately look for a way they can disqualify a claim on an extended warranty, even if it is valid an issue might take a long time to get an item replaced or repaired.
Businesses are not clueless. They know from a customer service perspective that if the hurdles are a big hassle many customers give up. The chat robot customer service lines and call transfers are not always there to just provide a better customer service experience. Companies know that if getting a refund or service equals a lot of work on the customer side that many of them give up.
Once a product or service is already paid for and the business has also been compensated for the warranty, don’t expect exceptional customer service or a speedy response for warranty issues. They have already made their money and servicing something under a warranty is not likely going to make a profit. The business might get to you, but if their time is currently occupied by money-making activities, you will likely have to wait. I have run into this issue more than once even with products that come with a standard warranty and there is an issue.
A recent example I have had with a warranty issue was with my home air conditioning system. When I purchased the system just three short years ago, I decided to get the extended labor warranty against my better judgment.
I have had nothing but problems with the AC system. The last time I called the AC company that installed the system they canceled one appointment I made and the second was a no show with no communication on when the AC technician would arrive.
When I purchased the AC system, I was told both the parts and labor were under the manufacturer warranty and any company could do the work. The last time I had an issue I called another AC company. They came and wanted to charge me labor. I showed the technicians the warranty for labor and was not charged anything. This AC tech let me in on the little secret that companies do not get paid as much for labor when they work under a manufacturer warranty.
The last time I spoke with the same AC company that was not the original one to fix a problem again, I was told they could not do it under the labor warranty and I would have to call the original company that installed the air conditioner.
My assumption here is the original AC company had paying clients and this is why my first warranty call was canceled and also why no one showed up to the second appointment. The check was already cashed for the AC a few years ago so there was no rush to help me and service it.
Don’t look for any special treatment if you buy an extended warranty for most things and actually need help.
Extended warranties specifically for automobiles
Although there seems to be an extended warranty for just about everything today, auto sale warranties are nothing new. Car dealers specifically use them to offset the reduced prices they offer on their cars and the average one can cost up to $750 or more a year plus interest when financing a vehicle.
Most of the money paid for an auto warranty goes to the dealer. Although there can be rare occasions when a vehicle warranty pays off, it is not common. A Consumer Report found on average a person pays $1500 for an extended warranty while the average repair is just $180.
Car dealer extended warranties are not for the primary purpose of protecting the buyer. They are there as another form of profit.
You don’t need an extended warranty for most things
Extended warranties in most cases are just a profit maker with 50% of the cost or more often going to the business that sells them. The problem is people often believe something they purchase will actually break much sooner than it probably should and this really isn’t the case.
There are also a number of protections already in place typically when a consumer buys something.
Already a manufacturer warranty
Even though most manufacturer warranties do not last as long as they once did, there is a good chance that you will already have 90 days and up to a year or more included in your initial purchase price. If you buy a service plan, you may just be duplicating some of the coverage you already have and paying an extra price for it.
Retailers and manufacturers should already give some type of warranty to their products, however a limited amount of time that might be today.
Most electronics are a good example of a warranty that already comes with a product. These are most often at least a year and items rarely break during this period. If you buy something like a new cell phone and pay insurance for the first year of it breaking due to normal use, then you are just throwing your money away.
You might have extended coverage already by buying with a credit card
If you make a purchase with your credit card, the card issuer might already extend the warranty of the item you bought. This will depend on the card, but you can call your credit card company and they should be able to tell you this information.
You might already have insurance coverage
Depending on what you buy, an extended warranty covering something stolen or malfunctioning might already be covered by your homeowners or renters insurance policy. Some insurance companies may also offer riders or additional services that are much less expensive compared to the extended manufacturer or retailer warranties. You would just need to reach out to your insurance company and see what might be available.
There is generally an implied warranty
Many things we all buy come with an implied warranty already. What this means is when you purchase something that product should work when it is used for its purpose. This is also often called an Implied Warranty of Merchantability.
Even when a product might have a disclaimer of “sold as is”, this might not mean much depending on the state you live in.
The implied warranty guarantees an item should work as it is represented and sold. If for example you were to buy a new refrigerator and the first time you plugged it in it failed to keep cool then it wouldn’t work as it was represented and sold.
Products are sometimes covered even when they are no longer under warranty
It is not uncommon in today’s world for a manufacturer to discover a product they sell poses either a hazard or breaks easily for some unknown reason. This is especially the case in manufacturing today with so many things being imported from countries with less stringent regulations and cheaper labor, such as China.
Sometimes even when a product is older and it breaks a manufacturer might fix it for free if it was on a recall list. If you bought something that failed and it could lead to litigation, there is a good chance the manufacturer would fix it at no cost.
When it comes to recalls and inferior products being repaired out of warranty you just need to be aware that they are not always what they appear. This can be the case for something like a vehicle recall. You may have gotten a notice at one time about your car needing a repair and it would be covered by the dealership. This might be the case, but I can almost ensure you the auto dealer will try to add something on or charge for something when you bring your car in to be repaired.
If you have an electronic that is recalled, the salesperson will likely try to get you to upgrade to a newer model if a repair on the current one is possible.
With recalls, extended warranties and product failures you can expect the business you are working with to try and profit even further than the cost of original product or warranty if you have to work with them.
A lot of things need to happen for an extended warranty to be worth the cost
The problem with paying for an extended warranty is so many things need to happen correctly to make it worth the cost should you need to make a claim.
- First, the item needs to break during the warranty period. Companies don’t make a big habit believe it or not of making terrible products. They know the history of their products and about when they will fail. This is how they know they will win on an extended warranty. Think of an insurance provider and their actuaries. Insurers don’t loose and this is why they own some of the tallest buildings in the world.
- Something needs to happen to the product you buy and the repair needs to be more than the price you paid for an extended warranty.
Does it truly ever make sense to buy an extended warranty?
Some consumers might argue that it can make sense to purchase an extended warranty on items for accidental breakage or loss. Think of cell phones, computers, and televisions.
If you travel a lot and throw around a laptop computer, it might make sense for an extended warranty. However, most people are not doing this and an extended warranty is just a waste of money.
Cell phone extended warranty or insurance coverage is another example used sometimes that people like to claim is worth the price. This coverage can vary but can be around $6-$12 per month. There is also almost always a deductible that has to be paid with a claim that could be as much as $200 or more.
My answer to a cell phone extended warranty is don’t buy a $1000 cell phone. Get one that is a model or two behind. There usually is not that much of a difference in functionality, but there can be a big difference in price. Self-insure your cell phone rather than pay every month for some type of extended warranty.
Even with accidental breakage or loss, the manufacturer and retailer win on the cost of an extended warranty.
Although extended warranties do have occurrences when someone gets their money’s worth, it is very rare. The extended warranty business is there to add to the profit of the business and manufacturer. It is a multi-billion-dollar business that can add as much as 20% and more to the purchase price of an item. Thus, increasing the profit margin for a company.
Many companies have even started to decrease their initial warranty on the things they sell while adding the option for an extended warranty with an extra cost. They understand the profit benefit of having a customer add on an extended warranty.
Extended warranties just rarely make sense when the extra cost is factored in. The reason for this is the things we buy rarely break as quick as we might expect. If you do buy an extended warranty and need to make a claim, it might also take a long time to get any service or there likely will be fine print that will deny a claim.
Companies are not in the business of losing money and this is particularly the case when it comes to them selling extended warranties.