Getty ImagesBy Aaron Crowe
If paying $100 or so for an extended warranty for your new electronic gadget will help you sleep at night and avoid nightmares of a smartphone emergency or laptop catastrophe, then it’s probably money well spent.
Consumers capable of putting their emotional worries aside, however, can save money by declining to buy a warranty that’s rarely used and not worth the cost for most products.
“From a purely economic standpoint, it usually doesn’t make sense to buy an extended warranty,” says Rajiv Sinha, a marketing professor at the W.P. Carey School of Business at Arizona State University.
But consumers aren’t always rational. When buying a car, iPad, phone, home or any expensive item that might break, they are willing to pay for peace of mind, says Sinha, who is currently working on a research paper about warranties.
Existing warranties. The first thing to consider before buying an extended warranty is the warranty that comes with the new product. Shoppers should check what’s covered under a free warranty, which typically lasts for 12 months, before buying an extended warranty.
How you pay for the product can matter. Buying with a credit card can extend the manufacturer’s warranty, though paying for part of the purchase with a gift card or cash could void the extension.
Normal wear and tear is usually covered, but dropping an iPad, for example, may not be. The owner may be required to maintain the product to the manufacturer’s guidelines, such as proper maintenance or cleaning, and not storing it under damaging conditions, according to the Service Contract Industry Council. About 80 percent of all extended warranties in the U.S. are offered by the trade association’s members, according to the SCIC.
A store’s return policy may also allow returns within 30 days, giving shoppers an easy return option if the item breaks shortly after purchase.
Costs vs. reliability. Paying $100 for an extended warranty on a $600 laptop doesn’t make sense because laptops are very reliable, Sinha says. Besides, you may want to splurge on a new one in a few years anyway when a cheaper, faster model is available.
Paying for a simple repair could be cheaper than buying an extended warranty.
If a warranty is more than 20 percent of the product’s price, it may be too much. According to the SCIC, most extended warranties are 10 to 20 percent of the sales price.
For Bryan Finnerty, co-founder and CEO of ProtectCELL, which sells extended warranties for phones and tablets, if the warranty price nears half the cost of the product’s retail price, then shoppers should probably pass on it.
The yearlong warranties that Apple (AAPL) offers cover most problems, but glitches, hang-ups and other issues its technicians can’t replicate aren’t usually included, Finnerty says. Apple Care warranties don’t cover the theft of a device, he says, but ProtectCELL does.
Check if there’s a deductible for repairs — ProtectCELL charges $50 to $150 in deductibles to repair tablets — and verify that the warranty can be transferred if you sell the product to someone else.
A good warranty on an electronic gadget should cover drops and spills — two of the most common causes of damage or destruction. But it should also cover other “accidents” that may happen from time to time.
“We’ve heard stories of people saying, ‘My spouse threw my phone at me, and this is what’s left of it,'” Finnerty says, adding that his company covers such tosses.
When you shouldn’t buy. Most expensive consumer products — refrigerators, washing machines, big-screen TVs and stereos, for example — are reliable and don’t break down often, Sinha says. And if they do, it usually happens within the original warranty window.
People who buy extended warranties for refrigerators, which Sinha says rarely fail, are giving in to their emotional side. The 40 percent of refrigerator buyers who purchase an extended warranty aren’t buying an insurance policy because they think the refrigerator will fail, they are buying one because they would feel foolish if the fridge breaks and they were left without coverage, he says.
“They’re buying a policy to insure them against their own guilt in case the product fails,” Sinha says.
In other words, consumers aren’t buying extended warranties for such products because they think they’ll break, but because they’ll feel bad if they do break and they didn’t buy the warranty. You wouldn’t expect a washing machine to fail, he says, but if it breaks after a year, you’ll have wished you bought the warranty.
When you should buy. Previously owned products, such as used cars, can be some of the best things to buy extended warranties for, Sinha says. “The bad products drive out the good products” when it comes to used cars, he says. By this he means there are a lot of bad used cars for sale while owners of good used cars opt to keep them. With the increased risk involved for used car shoppers, getting an extended warranty is usually a smart financial move.
A home warranty can be a good purchase, especially if it’s for an older home that has dated appliances. It can also pay to buy extended warranties for specific items added to a home.
Margaret King bought the lifetime warranty from Home Depot for all 26 windows of her Philadelphia town house when she replaced them 10 years ago. The warranty was part of the window cost, which was about 20 percent more than equivalent windows with no warranty, King says.
She’s used the warranty about six times to replace windows. Without the warranty, she would have had to pay about $500 in replacement costs out of pocket. “It’s quite refreshing to pick up the phone, not your checkbook, to correct any problems — from stains to breakage to track issues,” King says.
The price of a home warranty can equal or exceed its cost in repairs, but that still doesn’t make it worthwhile to some people. Tyler Gray, a financial adviser in Tulsa, Okla., says he recommends that clients put the money in a savings account to pay for repairs instead of buying a home warranty.
The home warranty that came with Gray’s house expired just before the water heater broke, requiring him to buy a new water heater. But the experience didn’t convince him to buy a home warranty, he says, because the warranty would have cost just as much as the heater.
“With that said, if something else breaks down in the next 11 months, I’m sure I’ll be wishing I would have spent the money since I would have come out ahead,” Gray says.
Regret avoidance was a strong motivator for Jeff Kerr of Denver. After spending about $500 every three to four months on repairs to his 2005 Mini Cooper S, he discovered that the car wasn’t reliable and had recurring issues.
So when Kerr recently bought a new Subaru Impreza Sport Limited hatchback, he gladly added the seven-year, 100,000-mile extended warranty for $1,400. It gave him peace of mind for the next 100,000 miles, says Kerr, who doesn’t regret buying the warranty.
Alternatives. Most extended warranties are offered by retailers when a product is sold, requiring consumers to make a quick decision about whether they want one. But it’s not a decision that necessarily has to be made at the checkout counter.
A new car owner can wait until just before a warranty expires — at 12,000 miles or two years, for example. ProtectCELL, which sells protection plans for tablets and phones, allows new customers to buy a warranty within 30 days to a year of getting their device.
Instead of buying an extended warranty, it can be more worthwhile to put the money that would have been spent on the warranty in an account that can be used to pay for repairs or to buy a new product when the existing one breaks.
Before you make a call on the warranty question, it can pay huge dividends to research how good the product you’re buying is. “If you know you’re buying a reliable product, I don’t see any reason” to buy an extended warranty, Sinha says. If you’re armed with the right information, the decision becomes much easier.
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