Is buying extended warranties a good idea? Sometimes they are called buyer protection plans too. The general consensus from almost all financial planners, writers and personal finance personalities like Dave Ramsey and Susan Orman is that they are a rip-off.
Most products come with some sort of warranty, and that is a good thing to compare when considering a purchase. However, automotive dealers and electronics dealers for example, are always trying to get us to buy contracts that extend the normal warranty beyond the store’s or manufacturer’s. Recently I bought a memory stick for less than $5, and I was offered a warranty by the cashier–come on, that is silly! The cost of the contract, or premium for the insurance, is usually expensive, and the odds are that most people never benefit from the investment.
They do provide some peace of mind, knowing that you won’t have to spend money in the future if the item breaks within a reasonable time period. I think there are several ways to make sure product failure doesn’t set you back financially:
- Compare customer product reviews and ratings online before purchasing.
- Research products in Consumer Reports. This costs a little money, but our library provides it online for free.
- Probably the best thing people can do is to make sure they have plenty of money in their emergency savings in case a product needs repair or replacement.
- We often buy the extended warranty ONLY for laptop computers and cell phones, especially for the one’s our children own. Laptops, tablets, cell phones and really nice iPods can be prone to break in the early years, so sometimes it is worth it to buy warranty extensions for these things.
- Purchase things from a good retailer that you trust. Often sellers will go to bat for you to fight or recover from the manufacturer, especially if they see a lot of similar problems. Sometimes local retailers will eat the cost of the replacement or repair if they want to keep you as a customer, especially if the product failure wasn’t reasonable at all.
- Purchase items with a credit card that automatically offers extended warranties for a few years. Call your credit card issuer to find out. This goes against Dave Ramsey’s advice to always use cash and avoid using credit cards since that often causes us to overspend and build up a balance. However, if you are excellent at staying under budget, and at non-cash negotiation, then using a credit card to provide extended warranties at no cost is a great idea.
Conclusion: Extended warranties are usually expensive and seldom used, so for the most part avoid them. If your car dealer offers you one, be sure to read the contract cover to cover a couple of times, to ensure that what you are considering buying covers those really expensive repairs that could really set you back.
