The Truth About Extended Warranties

Recently I stopped into Toys R Us to get a little something for Eli. Yes I am one of those grandmothers. We found the cutest ever toy Shaving Kit, just perfect for bath time. The price was under $10. At check out, and without missing a beat, the sales clerk inquired if I would like to add an extended warranty for just $4.79. Seriously. I laughed. She winced. I apologized but really, I couldn’t help it.

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An extended warranty sounds like a good thing and that’s because it’s designed that way. While I cannot say that every extended warranty would be a rip off, that’s the way I want you to start thinking of them. Every time you are offered and extended warranty, think: RipOff! Then if you have doubts, make that warranty prove to you otherwise.

Failure rates. Products for which there is an extended warranty always come with a manufacturer’s warranty. We know that if a product is going to fail, most of the time it happens at the start of that product’s life, not in the time after the original warranty expires. That means you do not need the extended warranty. As a rule, rely on the warranty that comes with the product. Then rely on your own independent research. 

Profit margins. Ever wonder why retailers are so diligent in offering extended warranties? Wonder no more. It’s all about–now here’s a real shocker–money. Extended warranties average a 70 percent profit for the retailer. Plus, if they can get you to finance the cost of the extended warranty the retailer ends up profiting even more. 

Suppose you buy a $750 extended warranty on a new automobile, and you include it in the amount to be financed. Here’s an estimate of the dealer’s profit: The dealer will receive $764 from you including interest you will pay on the financed extended warranty after taking into consideration the 30 percent payout on claims. Now do you see why retailers push their extended warranties? 

Here’s a novel idea: Instead of buying extended warranties, set up your own “Repair & Maintenance” savings account for all of your fixed assets cars, boats, RV’s, appliances, toy shaving kits and so on. Now make payments to your own extended warranty program every month. That way, if you do need major repairs once the regular warranty expires you will have the money set aside and ready to go. 

On the other hand if it turns out you never require major repairs (statistics are in your favor, by the way), the “extended warranty” funds become your profits, not the retailers’.

On a personal note, there are only two products I have and will continue to buy the extended warranty, because both of these are notorious for failure after the manufacturer’s warranty: Apple products (iPhone, iPad, MacBook, MacPro and so on) and treadmills. Maybe I am the only one who beats up my electronic devices, but that’s a pretty solid rule for me. As for treadmills, my experience and research suggest they are also notorious for breakdown with extended use. You should create your own, well-thought-out very short list of items for which an extended warranty may be a wise decision. Then stick to it.

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9 replies
  1. Michael E. Rose says:

    For me extended warranty is always beneficial. Recently I have bought a used car and bought an extended warranty with that from Warrantech . This warranty covers all the wear and tear.

    Reply
  2. frenchie says:

    I bought the extra warranty on my ipad, and it saved me money – I dropped it and broke the glass a few months later; Apple repaired it for 40$ with a 48-hour turnaround time! Without the warranty the same repair by Apple would have cost over 200$.

    Reply
  3. Cath says:

    Car warranties are notoriously bad. I worked in the car business for years and know how lucrative they can be for dealers. But the kicker is, you’re not even getting the benefits of the full warranty, and you never will.

    For instance, if you buy a new car that comes with a 3 year, 36,000 mile basic bumper-to-bumper warranty, and the dealer tries to sell you a 5 year, 60,000 mile extended warranty, it doesn’t kick in at the end of the 3 years. The clock for the extended warranty starts ticking the second you drive the car off the lot, which means you are paying for a 5 year warranty, but you only get to use the last 2 years of it. If you have a bumper-to-bumper basic warranty, there’s no reason to use the extended warranty until the basic warranty has expired. Sure, there’s a chance you will hit the 36,000 miles before the 3 years is up, but you’re still paying for something you can’t even use until one of those limits is expired.

    Reply
    • Nicole Gemme says:

      We were so fortunate to have a good power train warranty on my Husband’s old car. It saved us a bundle!

      Reply
  4. DB says:

    Never buy an extended warranty from Lowe’s. I bought one on a fridge a few years ago. When it had a problem, they sent a subpar repairman to my home who ended up doing permanent damage to the freezer. When I called Lowe’s Warranty Dept to complain, the response was “It’s not our problem. That’s between you and the subcontractor.” They gave me that exact quote on three occasions. Only once did they try to contact the contractor and when he refused to talk to them, they said that was all they could do. The subcontractor stopped taking my calls. Lowe’s provided me with no help whatsoever. The freezer was never fixed and still has damage to this day. Even after this Lowe’s continued to use this contractor until he went our of business. I won’t buy appliances from Lowe’s ever again.

    Reply
  5. Riva says:

    My experience is that with any small electronic devices the warranty is worthwhile. We recently purchased earbuds for my son’s mp3 player. He is only 12, so I didn’t want to purchase something very expensive. I thankfully bought the warranty for it, which would not have been covered because the product is not defective. Need to return it this week. My son broke them.
    September ‘s purchase of an electric pencil sharpener is another example. We had two problems with it. The first, that the motor isn’t strong enough anymore is covered automatically, but my baby climbing to the shelf where it is stored and dropping it (it broke) would not have been covered. I’m thankful I purchased the warranty. Bikes are another worthwhile category…we can’t afford the really expensive bikes and the $150 ones break. With our extended warranty, we get them replaced until my children outgrow them.

    Reply
  6. Janet says:

    Good morning Mary,

    I agree with you that extended warranties are usually a waste. However, we have learned they are often well worth the money when we’ve been foolish enough to buy new styles of appliances. Thankfully we were offered these warranties toward the end of the original warranty and knew it was worth the investment based of the numerous trips the repair company had already been to our home.

    When considering purchasing an extended warranty shoppers would want to know what it does and does not cover. I know a man who worked for an extended warranty company for mobile phones. Water is one of the most common culprits to damage a mobile phone yet is excluded in the coverage for this company’s policies.

    Finally, I was quite surprised of your comments on Apple products. We have 13 Apple products in our home ranging from several years old to recent purchases. We’ve seldom had problems with them. Apple products are (according to JD Power for several years in a row) the least problematic.

    I appreciate the great information you have in my inbox each morning. 🙂

    Reply
    • Angie says:

      I agree with your comment about buying new styles of appliances or electrical type things and warranties. My first digital camera cost me $1500 and I bought an extended warranty because it was the first camera to use mini CDs to store photos on (yes, this was a long time ago). When the camera needed over $800 worth of work done to it after the regular warranty was up I was glad I had spend the extra money on the extended warranty. However, overall I do believe that these warranties are a waste of money. It can be a gamble either way.

      Reply
      • reenie says:

        one of my sisters worked for service merchandise years ago (not even sure they are still in business), but i remember her telling me she sold a $20 extended warranty on a $10 calculator and made a nice commission!

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