Say you’re standing at the checkout counter of an electronics store, and the cashier asks if you’d like to purchase an extended warranty on your new flat screen. Should you do it?
Retailers love to push extended warranties because they’re almost pure profit. Very few people who buy one actually end up using it, which makes it a great deal for the retailer.
TVs, computers and other electronics are among the most common items people buy extended warranties for. But the quality and reliability of electronics have improved steadily over the past decade. Failure rates for flat screen TVs, for example, are as low as 3% over the first 3 years of ownership. So essentially you have a 3% chance that your TV will fail during that time. It just doesn’t make sense to shell out extra money when the odds of your device needing repair or replacement are so low.
You also have to consider the cost of the warranty versus the replacement cost of the item. It’s common for an extended warranty to cost 10-15% of the item’s cost. Two years from now, your new TV won’t be worth nearly what it is now because of rapidly changing technology. If it does fail after the original manufacturer’s warranty expires, you’re better off using the money you saved from not buying the warranty towards a new TV.
Electronics isn’t the only category that offers extended warranties though. They’re are also sold alongside appliances, cars, furniture and even homes. Again, the chances of you benefiting from an extended warranty for these items is slim. Especially in the case of home warranties, companies find all sorts of excuses to get out of paying for a claim. They put a number of exclusions into the contract, so that only if your furnace breaks on the second Tuesday of June and it’s raining outside will they cover the cost of repair. (Silly example, I know, but hopefully it drives home the point.)
When it comes to extended warranties, in almost every case you’re better off building an emergency fund that’s large enough to cover unexpected repairs.
One final tip: Many items come with an original warranty of 1 year, or 3 years, or some other length of time. If you charge the item to a credit card, some credit card companies will automatically add an extra year onto the manufacturer’s warranty for free! Check with your credit card company to see if your card offers this benefit.