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Why extended warranties are a bad deal

From my experience, extended warranties are rarely a good deal. Last week, I was at Toys R’ Us shopping for some Christmas gifts. I came away almost empty-handed, aside for a $29.99 toy I got for my nephew. Immediately I got asked if I wanted to sign up for their Buyer Protection Plan. Really? The toy didn’t even have any moving parts, what could possibly go wrong?

If you have a child, you know that toys have a really short shelf-life – and by shelf-life, I mean kids will often get bored of it, well before the toy breaks down. Yet, we often get persuaded to sign up for these warranties, without actually thinking or knowing all that much about them. So what gives? Well for one, salespeople often get paid bonuses or a higher commission on warranty sales and are encouraged to push warranties you don’t need.

About a month or so ago, a friend of mine asked me to go to Staples with him to help pick out a printer. And as we did, the lady at the cash desk rang his purchase through and asked if he would like an extended warranty and without even thinking or blinking, he agreed. Without knowing any of the terms or even what it would cost him. Luckily I was there to convince him otherwise. I told him If in three years it broke, I’d buy him a new one. Now, while I can’t offer the same warranty to everyone reading this, this holiday season I can offer this simple advice:

Skip the extended warranties

Often the manufacturer’s warranty is enough. Consumer Reports states that according to their data, products seldom break within the extended warranty window. If products are going to break down it’ll usually happen at the beginning and not 3 years into the product’s life. In the past, I got sucked into buying them myself, and I had yet to use one. Here are some simple reasons you should avoid them:

  1. Extended warranties are simply too expensive. Extended warranties are basically insurance on whatever you’re buying. So you buy a $100 toy and they sell you on a $10/yr service plan. Seems harmless enough, but that’s 10% of the cost just in the first year. If you were told that you had to pay an extra 10% on your home insurance premiums, you’d be mad. So if you wouldn’t pay an extra 10% to insure your home, why would you pay it to insure a toy. The cost of repair is also often the same cost as the warranty.
  2. When was the last time you made a warranty claim? Exactly! The same people that say “you never know”, will be saying “you never know” years from now. Cut the “you never know” protection and research before you buy. Read the reviews. Are customers frustrated or are enjoying their product/brand for years to come?  Consider the last time one of your products broke down and needed repair.
  3. What you buy devalues over time. Products like electronics begin to lose their value almost as soon as you pick them off the shelf. Today’s newest smartphone, won’t even be worth the cost to fix it a couple of years from now. Besides, you’ll want a new one, by the time yours breaks anyways. So instead, try putting the money aside and use it to buy a new or newer used one, when something happens to yours.
  4. Warranties don’t cover much. If you actually read all the fine print, there’s a lot of exclusions. Search your store’s warranty policies and reviews of them, to see how worthwhile they are. Some of the things they don’t cover include improper use (really?) improper packaging and shipping, and a host of others crazy exclusions you can find here. And in most cases, you have to go in with your original receipt. Right, so where did you put that 3-year old receipt? And when or if you do find it, is the ink still there and legible?
  5. Most credit cards already offer some form of warranty protection. Check your credit card policy. If you buy the item with your credit card, some will even double your manufacturer’s warranty. As with anything, it all depends on the card you have. Always check the fine print.

Now that’s not to say that there aren’t times when those warranties are worth it, I just can’t think of any. But if you’re looking for peace-of-mind, it may be worth it to you, just always make sure you read into the details before buying. Some good retailers will also allow you to add the extended warranty up to 30 days after your product purchase. And besides, most products are already warranted with a 14-30 day warranty anyways – it’s called a return policy.

What do you think of extended warranties? Have you ever redeemed one? Do you find them useful?

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