A Smart Guide to Buying Extended Warranties

Buying Extended WarrantyPlanning to make a big purchase soon?  No matter if it’s a new laptop or replacement windows for your home, you’ll probably be faced with the question of whether to purchase or pass on an extended warranty.

For many, buying an extended warranty just seems like a no-brainer.  There’s valuable peace-of-mind in knowing that you’ll be able to avoid big, nasty repair and replacement costs should something go sideways.

That’s generally been my philosophy.  I’ve purchased my fair share or warranties – some that still seem smart in hindsight, some that fall  into the “what in the world was I thinking?” category (custom rim protection, anyone?).

But the truth is, choosing whether or not to invest in an extended warranty should be a case-by-case decision.

Some products, like an HVAC or refrigerator, are ideal for an extended warranty.  You’ll usually want to keep the same model for a long time and they don’t have the extra “emotional” tax that is associated with products we love – think a phone or laptop.  Others, like most consumer electronics, aren’t worth the paper they’re printed on in most cases.

When should you consider ponying up to protect your new purchase?  And when should you save your hard-earned cash for something a whole lot more useful – like your next new laptop?  Read on for four simple warranty-buying tips.

Do the Math
For large, expensive purchases, it pays to put a ballpark figure on how much it should cost you to insure a product.  The first step in that process is heading to the search engine of your choice and researching failure rates for the general product category and the specific brand you’re purchasing.

Consider a new laptop.  The three-year failure rate for all new models hovers just over 20%, while premium brands like Asus and Toshiba fair slightly better, checking in at 15.6% and 15.7% respectively.

Now do the math.  An extensive, no-deductible, three-year policy on a $500.00 laptop will run you in the neighborhood of $250.00.  But given the failure rate of 20% within three years of purchase, you should only be willing to pay $100.00 to cover the product for that period.

The actual calculation looks like this: $500 (the purchase price) x .20 (the average failure rate) = $100 (the ideal break-even point for an extended warranty considering the price and risk of issues).

That’s a pretty good summation of why extended warranties are rarely a good idea for consumer electronics.  Why spring for an extended policy when a laptop is already covered for a period of time by the manufacturer’s warranty, only up-to-date technologically for about two years anyway (or so says Moore’s Law), and will depreciate by hundreds of dollars over that three-year window?

And that’s before even considering the additional cost of the warranty and the small chance that it will provide a solid return on investment.

On the other hand, expensive, long-lifespan items – like large appliances – are more likely to make sense financially.  Warranties for these products generally aren’t as costly (in relation to the sticker price) and are more likely to pay-off over the long haul.

But remember to double-check your intuition before you buy.  A refrigerator that costs $2000 and has an average ten-year failure rate of 4%?  Unless the protection plan is less than $80.00, it’s still probably not a great use of your money.

Use Existing Warranties First
Most products come with a built-in factory warranty that covers the first part of ownership – the time when replacement costs most prohibitive.  So by the time your factory warranty is exhausted, purchasing a replacement will be much cheaper – in some cases less than the cost of the extended warranty itself.

In addition, if you use a credit card to make a purchase, any built-in limited warranty can generally be extended for a period time at no additional cost.  All four of the major credit card networks – Visa, Mastercard, Discover, and American Express – offer extended warranties that add up to a year of additional coverage to the factory plan that came with the product.

A good rule of thumb for most extended warranties: if you can afford to self-insure, do.

Why?  Well, for one, warranties are extremely profitable for retailers.  Best Buy makes almost half of its profits from warranties – pulling in a profit margin that’s nearly 18 times the cost of the products they sell.

That alone shouldn’t automatically stop you from getting an extended warranty, but it does underscore an important point: most people don’t use their coverage.

If you’re on the fence about whether or not to buy a warranty, consider putting the money you would use on a plan into a special savings account.  That will provide an emergency fund if you should need repairs – or a down-payment on a new item.  And if you don’t use it, you’re not out the purchase price of the warranty plan.

Read the Fine Print
Before you buy a plan, exercise your rights as a good consumer.

It’s the retailer’s job to sell you on the policy – whether you need it or not.  So read the fine print: know what the factor warranty covers, what you’ll pay over the course of the warranty, exactly how long it lasts, and who will be servicing your repairs – will it be handled by the Geek Squad or mailed to some service provider several states over.

And remember that you usually have a grace period to make a decision on whether you want or need a plan.  So be sure to do the math or consult an outside source before you buy.

Have a specific warranty question? Ask away in the comments section below or shoot us an email at letsgocu@gmail.com.

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