When you purchase appliances, electronics or furniture, you are usually asked (and sometimes pressured) to purchase the extended warranty. The salesperson has a long list of reasons why you need the warranty ("What if your kids drop it? What if your dog chews on it?"), and some of these reasons can be pretty convincing. In fact, in a PC World survey, over 63 percent of respondents said they purchased extended warranties. However, most of the time, they just aren’t worth it. Here are five reasons why you shouldn’t pay for the extended warranty:
1. Credit cards offer warranties
A fact a lot of people tend to overlook is that most major credit cards (MasterCard, Visa, American Express) already extend the warranty on any products purchased with the card—for free. For example, MasterCard doubles the manufacturer’s warranty up to one additional year. Visa does the same, and also adds a year to any product warranty between one and three years. Before buying a new product, check out the extended warranty details on your credit card—you probably already have a good extended warranty plan!
2. Warranty cost is equal to cost of repair
According to Consumer Reports, since the price of the extended warranty is so high (on average one-third of the price of the product), it usually costs as much to pay for the repair as the warranty costs. So there are really no financial savings—you are not spending $100 today to save $250 down the road, you are spending money today instead of possibly spending it in the future.
3. Products tend to break after the warranty expires
Consumers of appliances, electronics, and furniture have reported in several news outlets, that if the product broke, it usually broke after the warranty expired. So not only did they purchase the extended warranty and then not use it, they had to pay for repair costs later. From my own experience, this is true—in the past, I have purchased extended warranties on a desktop computer, a laptop computer, a child's dresser and a digital camera. All four of these products ended up breaking after the extended warranty expired.
4. Specific timing restrictions
Two of the largest companies that offer extended warranties on furniture have clauses in their plans that damage must be reported within three days or the repair will not be covered. Another clause states that if you attempt to clean any spills before you report the damage, they will not clean the stain or pay for it to be cleaned. Sure, you could lie about trying to clean the stain or how long ago the damage occurred, but besides the fact that it’s dishonest, you may want to consider if all of the hassle and worry is really worth it.
5. Extreme profit for stores
Most retail stores like Best Buy, Sears and Staples average a gross profit of around 23–25 percent on products they sell. However, the gross profit on extended warranties is at least 50 percent. That’s over twice the profit these stores make on their products! This extremely high profit margin tells you that it doesn't cost the stores very much to offer these warranties. Maybe that's because most warranties expire unused, or perhaps aren't as good of a deal as they appear to be on the surface. In either case, if you do opt to buy an extended warranty, understand there’s a good chance you’re only paying for peace of mind.