Don’t Buy That Warranty

You're betting your product will break. It probably won't.

The last question you are asked before you complete many purchases at checkout often causes hesitation: “Would you like to purchase the extended warranty on your product?”

An extended warranty — also marketed as a service plan — is a form of insurance on your purchase. It’s also a gamble. When you buy an extended warranty you are essentially betting that it’s probable your device or appliance will break in the next several years, costing you a lot of money in repairs.

Store clerks and salespeople push the extended warranty because they’re cash cows for retailers. Consumer Reports advises against buying the plans.

“Stores keep 50 percent or more of what they charge for these contracts,” says the organization in its 2014 Warranty Buying Guide. “That’s much more than they can make selling products.”

Warranties are slippery little devils. Consumers don’t know failure rates of the item they are buying off the top of their heads. Even with a little research, finding those numbers can be difficult because companies aren’t anxious to share failure rates. And many times, an extended warranty purchase is a snap decision made at point of purchase.

In a recent survey by Consumer Reports, 74 percent of consumers say they were pitched the idea of buying a service plan. In-store electronics shoppers were not more likely than online shoppers to take the bait, however – 16 percent bought the extra protection in-store, while 12 percent bought it online.

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So, is the warranty worth it?

An unofficial poll at a checkout line in a Target store in North Reading, Massachusetts, found the 5 out of 7 consumers don’t purchase an extended warranty plan — on anything. Their reasons ranged from “many times there is a built-in warranty,” to “it’s just money down the drain.” One shopper said adding any costs to any large invoice, like a car purchase, is unthinkable in the present economy.

When considering an extended plan, you should first check to see if there is a warranty — the manufacturer’s warranty — already in place on your product. This free warranty typically lasts 12 months, and is included in the purchase price. Ask this question first.

BulletPointSampleHow you pay for the product sometimes matters, too. Paying by cash or gift card can void a warranty, while buying with a credit card can extend the manufacturer’s warranty.

Be educated as to what is covered in the free warranty, take that extra two minutes to question the clerk or sales associate. Manufacturers’ warranties usually cover “normal” wear and tear — but who says what normal is? They may agree to repair an iPad that just stopped working, for example, but if it was accidentally dropped on the floor, they won’t.

Ask yourself whether you really need that extra coverage.

“Products seldom break within the service plan window,” says Consumer Reports in its Warranty Buying Guide. “Our data show that products usually don’t break within the two- to-three-year period after the manufacturer’s warranty expires and the service plan is in effect.”

If you do purchase an extended warranty on electronics, it should cover drops and spills, as well as other accidents.

“We’ve heard stories of people saying, ‘My spouse threw my phone at me, and that’s what’s left of it,’” the CEO of ProtectCELL, an extended warranty company, told U.S. News and World Report. ProtectCELL would cover this loss.

Consider the cost of the warranty. A good rule of thumb is that if the warranty is more than 20 percent of the purchase price, it’s not worth the gamble. So if a product is $600 and the warranty is $100, walk away. You may be ready for a new product anyway by the time the current one breaks.

There is psychology in the mix here, too. Warranty companies know how human beings think – you may not pay for a warranty on an item you aren’t personally attached to, like an oven or a freezer, but you may take an extended warranty on a cell phone without hesitation — you love your phone, and see yourself as unable to live without it. Ask yourself if the extended warranty is an emotional purchase.

A warranty offers peace of mind, so some consumers may be willing to pay more just to know their product is covered.

“From a purely economic standpoint, it usually doesn’t make sense to buy an extended warranty,” Rajiv Sinha, a marketing professor at the W.P. Carey School of Business at Arizona State University, told U.S. News and World Report.

The bottom line? Ask questions about coverage included in purchase price; never spend more than 20 percent of purchase price on a warranty; consider whether your purchase of a warranty is more emotional than fiscal; and remember the huge margins retailers are making on these plans.

Instead, put the money you would spend on a warranty in the bank. It will earn interest, and be available should you need a repair on your product — and chances are, you won’t.

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