Have you ever wondered why stores try so hard to sell you an extended warranty when you buy an appliance or other product?
Consider this: Extended warranties carry profit margins that can exceed 200%, compared with a mere 15% to 20% margin on the products themselves, according to a recent report by the Institute for Operations Research and the Management Sciences.
So, are extended warranties worth it? Probably not. They may be a bonanza for stores that push them, but they’re rarely a good deal for consumers. That’s why most experts suggest you just say “no.” Or “no, thanks,” if you want to be really polite about it.
Sharon Franke, director of the kitchen appliances and technology lab at the Good Housekeeping Institute, or GHI, says she advises against them for several reasons. For one, products rarely break down during the period that extended warranties cover. If a product is going to fail, it will most likely happen while the manufacturer’s original warranty is still in effect — or years later, after the extended warranty has also expired. For another, if a product ever does need repairs, they may cost less than the extended warranty would have run you.
Why do consumers buy extended warranties?
Loss aversion. Consumers feel it hurts 3 to 4 times worse to pay for repairs than to pay for a new product, a study shows. This drives them to buy “insurance” to achieve peace of mind.
Rather than wasting your money on extended warranties, Franke and other experts suggest some less expensive alternatives.
1. Create an emergency fund
If you have to repair a product or buy a replacement, you can just pay for it out of that account. If the product never breaks, the cash will be available for other unexpected bills. You’ll not only have “peace of mind,” as the sales pitches for extended warranties often promise, but money in the bank.
2. Consider your credit cards
Many cards will add a year to the manufacturer’s warranty — at no cost to you if you use that card for your purchase. You can check your card agreement or call the issuer to see whether yours does and, if so, what types of products are covered and excluded. Products with the Good Housekeeping seal, Franke says, are also covered against defects for two years, generally doubling the manufacturer’s warranty.
3. Contact the manufacturer
As a goodwill gesture, manufacturers will sometimes repair or replace a defective product even after the initial warranty has expired, says Carolyn Forte, director of the home appliances, cleaning products and textiles lab at the GHI.
4. Ask the store to give it to you
If you’re making a large purchase, such as several major appliances, and the salesman won’t budge on price, see if the store will throw in an extended warranty for free, Forte suggests.
Extended warranties may not be worth buying, but a free one couldn’t hurt.