What You Should Know Before You Buy Extended Warranties
Extended warranties have a thrifty appeal: Pay money now and save potentially more money if the item you buy needs repairs. But should you buy extended warranties? In most cases, the answer is “You don’t need them.” Here’s why.
Extended Warranties Are Usually Unnecessary
Extended warranties are big business. According to Allied Market Research, the global market for service contracts totaled $120.8 billion in 2019. The companies selling them wouldn’t be in the business if they were losing money. Here’s what Investopedia has to say about the warranty marketplace:
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.
You may not end up using your extended warranty, especially if you bought high-quality items. Plus, the cost of repairs may be less than the warranty cost. A Consumer Reports feature on automobile protection warranties reports that “car owners typically paid more for the coverage than they got back in direct benefits.”
Most likely, the product you are purchasing already has a warranty. That’s the manufacturer’s warranty, also called a product or factory warranty. Before buying a product, check the period that the manufacturer’s warranty covers—usually one to three years. Knowing this can help you decide whether an extended warranty is worth the cost.
When You Might Want an Extended Warranty
Sometimes it can be a good idea to purchase an extended warranty. For example, additional cellphone coverage might benefit you if you’re like many people and put your phone through the wringer, dropping it, cracking the screen, and so on.
The above Consumer Reports article states another potentially good reason to buy an extended warranty is if you are purchasing a car known for unreliability.
Finally, if you are concerned that you couldn’t afford the repairs, a warranty might benefit you.
What You Can Do Besides Buying a Warranty
You can start by researching the item you are considering. Read consumer reviews to determine the quality of the product, its typical repairs and defects, and how much repairs can cost. If you want to buy an automobile, Consumer Reports’ reliability ratings can be a good resource.
The research you do can help you decide if the extended warranty is worth the expense. An alternative, however, is to earmark the money you would have spent on the contract and put it in your savings account for potential fixes.
Finally, check with your credit card provider to see if they offer a warranty on purchases you make.
What to Check for If You Buy an Extended Warranty
If you decide to buy the contract, make sure to read it first to understand the terms. You want to know which repairs are covered and which ones aren’t. Some warranties change the coverage if you don’t do routine maintenance or if you modify the product; you’ll want to check for that as well.
Look into the claims process, including whether you need to take the product to a specific location. Is that location convenient for you? Or if you need to ship it, who pays the shipping costs? Are there other costs, such as deductibles?
Finally, the Federal Trade Commission recommends checking with your state consumer protection office for complaints about the company selling the warranty. You’ll find Colorado’s information here.
Making an informed decision will help increase your satisfaction with the warranty you purchase. If you have doubts about the cost-effectiveness of the contract or the purchase itself, you might talk with your financial advisor.
Our fee-only retirement planning firm in Greenwood Village, Colorado, often advises clients on purchases as part of the financial planning we provide. Schedule a complimentary 15-minute call to discuss your financial situation and how we may be able to help.
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