Warranties

Credit: nirots

Let’s say you have just finished picking out something such as a new smartphone, a refrigerator, or a car. Doesn’t it feel good? All of that weight that’s been on you as you try to make what you think is an informed decision based on your hasty research and the salesperson’s rapid jargon almost immediately leaves your shoulders just as soon as you utter a derivation of the words, “I’ll take it.” But alas, your relief is short lived. That ever so friendly salesperson has one more devious question at their disposal: "Would you like the extended warranty?" Oh, the humanity!

Personally, I’ve always been inconsistent on extended warranties. Sometimes I go with them, sometimes I don’t. My general rule of thumb has been if it is really expensive or if there is a pretty good chance that I can mess it up, I go with the extended warranty. If it’s not that expensive of a gadget or gizmo, it’s really good quality, or I think there is a pretty good chance I can protect it, I usually don’t. So when someone recently asked me to weigh in on whether extended warranties are a good financial investment or not, I had some work to do, and I’d like to share what I found.

First of all, let’s call a spade a spade. An extended warranty is nothing more than a bet. If we were talking about the Dallas Cowboys and you asked me if you should make a bet on their game this week, the answer is maybe. You might bet correctly, and then of course it was a good idea to bet, or you might bet incorrectly, and then of course it was a terrible idea for you to bet. Only time will tell! Extended warranties are just like bets, only we’re talking about the Whirlpool Front-Load Washers, not the Dallas Cowboys.

Based on my research, and now, in my opinion, extended warranties do not seem to often be a good financial investment. Dr. Rajiv Sinha, a professor of marketing at Arizona State University who is currently working on a research paper about warranties seems to put it best when he says, “From a purely economic standpoint, it usually doesn’t make sense to buy an extended warranty, but consumers aren’t always rational. When buying a car, iPad, phone, home, or any expensive item that might break, they are willing to pay for peace of mind.” In a recent U.S. News and World Report article, Dr. Sinha continues making his case by offering, “Consumers aren’t buying extended warranties for such products because they think they’ll break, but because they’ll feel bad if they do break and didn’t buy the warranty. You wouldn’t expect a washing machine to fail, but if it breaks after a year, you’ll have wished you bought the warranty.” How true are his words? They are somehow profound and obvious at the same time.

Other tidbits I found were...

• If you are buying a typically reliable product from a reliable brand, you likely don’t need an extended warranty. If it’s going to break, the odds are it will happen within the original warranty or return window.
• Laptops and tablets are more likely worth getting warranties on than desktop computers. Their parts are smaller, and they will probably face more wear and tear.
• If the price of an extended warranty is anywhere near the fair market value of whatever widget you are about to purchase, you probably don’t want it. Besides, aren’t you going to want the latest and greatest version that’s faster and more lightweight in a few years anyway?
• Used cars and previously lived in houses may be good items to buy an extended warranty on. No matter what CARFAX or the convincing home inspector tells you, there has got to be a reason someone doesn’t want that car or house anymore; otherwise they’d still be driving it or living in it! Like all warranties, this could be hit or miss, but no one wants to get stuck with a lemon - especially a big one!
• Before you add on an extended warranty, see what basic warranty you are getting. If the product, store, or even your credit card offers you a longer time frame or additional guarantees, you may not need that extended warranty emotionally or financially!
• If you are negotiating something big, such as a house or a car, and you’re close to agreeing on a price, see if you can get a more favorable extended warranty. There is no harm in asking, and as long as you are not paying a lot more than you were already willing to pay, you’re sort of getting an extended peace of mind for free.

 

So what should you say the next time someone asks you if you want an extended warranty? It depends. I’d listen to your head and consider your wallet or purse, but I’d probably still go with my heart. After all, it’s just a bet - one that I hope you win.

 

-Tom