Extended Warranties: Worth the While or a Waste of Funds?

When you go to finance a large purchase like an appliance or a car, you’ll often hear the question: “Would you like the extended warranty on that?”  If you’re like many people, you’ve been trained that extended warranties are a waste of money and are used to gain extra funds for the seller of the product. However, if they’re still being sold, that means someone must be buying them.

So the question remains: are they a good investment, or a scam?

In the end, it really depends on the purchase. Sometimes, an extended warranty definitely makes sense, but it’s wise to ask these three questions before you make your final decision:

Always think about the extended warranty before you put your money down!
What are you buying?

Before you buy any product, you should always research to find out not only which style and brand to buy, but to know the durability and reviews of the product you’re buying. Is your camera known for breaking down early? Does your TV tend to need servicing only a few months after it’s purchased? Extended warranties are often valuable when you're financing a vehicle because of the price you’re about to pay and the amount of possible repairs that could arise.

Also remember that some items are bought with short term commitments in mind. For example, many people buy smart phones with the intention to use them only for a year or two before buying a new one, so thinking about the longevity of the purchase is important. For more items that probably won’t need an extended warranty, check out this list on FinancialHighway.com.

2) Does your credit card protect your purchase?

According to the blog at Lawyers and Settlements.com, many purchases made with credit cards will have extended warranties added on to the item. If you aren’t sure what coverage could be added on, call the customer service number on the back of your card, and ask a representative what type of coverage perks are added when you use your credit card.

3) Does it follow the 10-20% rule?

According to Consumer Reports, a good rule of thumb to follow is to avoid spending more than 20% of the retail price of an item for the extended warranty. Some mark-ups can be as high 50% of the retail price, which often mark them as being a scam on the part of the seller.

What do you think – buy the extended warranty or turn it down every time?  

Comments for Extended Warranties: Worth the While or a Waste of Funds?

Name: Jesse Butler
Time: Monday, September 24, 2012

I bought a 2012 Mazda 5 on September 22nd. Toward the end of the purchase, I discussed extended warranty options with the finance representative at Gainesville Mazda. The finance rep's approach to selling me on the extended warranty was to show me my total monthly auto loan payment with either the "Gold", "Silver" or "Bronze" plan versus my payment with no extended warranty. If I remember correctly, I think the "Gold" plan added about $65/month to my payment. In the end, I chose not to take any extended warranty, but one I would have found helpful during the discussion about it was an explanation of how much the warranty would have cost in relation to the price I agreed to finance for the auto. I wish the rep could have told me something like this -- "You'll finance [for example] $20000 for the auto itself, if you opt for the Gold plan, with the payment I've given you, you'll be doing the equivalent of financing [essentially] $22000". Giving a figure like this would have let me estimate the cost of major repairs over the term of the loan versus the outright price of the warranty, in addition to working the proposed monthly payment into my budget.

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