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Extended Warranties: Quite a Stretch

By Siddarth Nagaraj on February 2, 2011

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All of us are eager to maintain and protect our possessions, especially those that are the most financially valuable (which are often the most expensive to fix). This natural desire for durability also applies when we prepare to buy a highly-priced product. Ironically, while we often eagerly conduct intensive research before acquiring a new appliance, we rarely assess the true value of an extended warranty in relation to our purchase. As this may vary depending on the item, it is all the more important to be aware of both the risks and benefits of extended warranties.

Extended warranties, also known as service contracts, offer insurance to cover the cost of repairing or replacing an appliance that has malfunctioned or become damaged within a specified number of years after the customer bought the item. While manufacturers offer extended warranties in conjunction with a wide range of products, they are most commonly associated with appliances and entertainment objects. Such warranties usually cost 10 to 20 percent of the retail price. Yet extended warranties remain controversial, and consumer advocates often advise against them for a number of reasons.

Opponents of extended warranties provide a number of arguments to support their position. They maintain that these warranties are often wasted since individuals who are concerned about protecting their material possessions seek appliances that are resistant to damage and therein less likely to need repair. Although this does not necessarily counteract any future need for repair, those who are considering extended warranties should be aware that other forms of protection (such as manufacturers’ warranties) often provide sufficient coverage, as do American Express and Visa Signature, which extend or double the manufacturer’s warranties. You should look into how this would apply to your purchase before making a decision.

Additionally, bear in mind that extended warranties operate more to the benefit of service providers than those who actually require assistance. Retailers often generate more profit from extended warranties than through actual product sales, a fact which is accounted for by the millions of such warranties that are purchased each year. Third-party administrators also reap large sums of money from service contracts; these groups are hired by companies to manage customers’ service contracts in exchange for half the money you paid. Many of these administrators provide poor service and can be unresponsive to customers, creating headaches for you in the future.

If consumer advocates maintain that extended warranties are often a waste of money, why do so many of us continue to purchase them? To begin with, extended warranties are often attached to appliances sold as leisure items. Given that we pay large sums for entertainment-oriented objects such as high-definition TVs and stereos, we are likely to seek some form of insurance to protect the investment that we made through our purchases. Additionally, those of us with less money may feel that we would be unable to repair or replace the appliance on our own, not realizing that the warranty itself may burden us with an equal or even greater cost. Taking that into consideration, it makes sense to assess how much a full replacement would cost in order to determine whether a warranty is right for you. Saving money may provide you with more resources than an extended warranty to address any future damage.

If you do choose to purchase an extended warranty, make extensive inquiries into how service will operate. See what those who have already entered into contracts with the service provider have written about their experiences online. Also identify any limitations to service, such as cancellation triggers, a cap on the number of covered service calls, deductibles, and refusal to replace the purchased item if efforts to fix it repeatedly fail. You can also verify the trustworthiness of the administrator by checking the websites of the Better Business Bureau and the state government’s Department of Insurance. Both groups rate administrators based upon the quality of coverage and service.

Extended warranties are questionable options when deciding how to protect your material investments. While you may feel that such a purchase would provide you with good insurance, remember the risks involved and recall that regardless of your decision, saving money will help you address any future problems.