Should You Buy Extended Warranties?
Whether you’re buying a car, a computer, or a washing machine, the salesperson will probably offer you an extended warranty. Having the cost of repairs covered for the next several years sounds great, but should you really buy extended warranties? Most of the time, the answer is “no.”
Read on to find out why extended warranties usually aren’t a great deal for the consumer, what you can do instead, and what to look for if you decide to sign the contract.
You Probably Don’t Need an Extended Warranty
Extended warranties can have their place (we’ll get to that in a minute), but your car/appliance/electronic device likely has a warranty—the manufacturer’s warranty. Also called a product or factory warranty, this warranty usually covers defects and breakdowns for a year or so after the purchase. This coverage can make the purchase of extended warranty coverage redundant.
What’s more, you may not end up using your extended warranty, especially if you bought high-quality items. Or the warranty cost might be more than the repair expenses you would pay. A Consumer Reports article on vehicle protection warranties states that “car owners typically paid more for the coverage than they got back in direct benefits.”
Think of it this way: The extended-warranty marketplace is lucrative. As this Investopedia article states:
Companies use probability metrics to calculate the likelihood that your new refrigerator, flat-screen television, or car will require repairs. This figure is weighed against how much those repairs would cost, on average. Needless to say, the company offering the policies is looking to come out ahead. Extended warranties can be big moneymakers for retailers.
According to the same article, Allied Market Research estimated that the global market for service contracts totaled $120.8 billion in 2019.
What You Can Do Instead of Buying an Extended Warranty
Before you buy your next big purchase, research the item you are considering. Read consumer reviews to get a better idea for the product’s quality, its typical defects and repairs, and how often you’ll end up calling a service person. For cars, check out Consumer Reports’ reliability ratings. Such research can help you decide if an extended warranty is worth the expense.
Rather than buy the warranty, though, you could earmark the money you would have spent on the contract for future fixes and put the money in your savings account.
Finally, check with your credit card provider. It may offer its own warranty for purchases you make using the credit card.
When You Might Want an Extended Warranty
Though we believe most extended warranties aren’t necessary, sometimes buying one might be a good idea.
One of those times may be when you buy a car known for its unreliability. In addition, cellphone warranties can be a good idea since we tend to take them everywhere with us, dropping them, cracking their screens, and so on.
Finally, if you could not afford to pay for repairs, an extended warranty might benefit you.
If You Decide to Buy
If you opt for the contract, make sure to read the fine print. You want to understand what is covered and what isn’t, and whether the coverage still applies if you modified the product or didn’t do routine maintenance.
You also want to know the claims process, including how you get the work done. Do you need to ship it to the repair shop or take it to a certain company? If the latter, is the location convenient to you?
Make sure to understand the fees you’ll pay, such as deductibles or shipping costs. Finally, buy your contract from a company that has been around for a while. The Federal Trade Commission advises checking with your state consumer protection office for complaints. (You’ll find California’s information here.)
Final Thoughts
Are extended warranties worth the cost? They can be under some conditions. But if you buy a quality-made product and can afford the repairs on your own, you’re probably better off putting the money for the warranty into your bank account. If you do decide to buy one, make sure to read the contract carefully.
Our fiduciary wealth management firm in Roseville and Folsom, CA, often advises clients on purchases, large and small, as part of the financial planning we provide. Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.