Last year my wife and I bought a new living room furniture set, and we finally succumbed to temptation and purchased a new television.  We were pleased with ourselves, thinking that we got a terrific deal on the entire set.  As we sat down to finalize the pricing and payment, there came the inevitable extended warranty pitch.

Luckily I was prepared, and after half-heartedly listening to the sales pitch I kindly rejected their offer for me to buy a $300 extended warranty for my brand new $800 television.  But for anyone who has ever been in this situation before, it didn’t end there.  They actually sent the Store Manager over to try more high pressure tactics to get me to buy the extended warranty on my television.

The real purpose of an extended warranty is to add to the store’s profits at your expense.  The extended warranty will pay the cost of repairing the item you purchased after the manufacturer’s warranty expires.  It is a product created and sold by the retailer, not the manufacturer.

Why You Shouldn’t Buy An Extended Warranty:

  1. If you finance the amount of the extended warranty, you will be paying interest on the cost of an agreement that won’t be in effect for one to three years.
  2. You pay for the warranty itself in advance even though it won’t be in effect for one to three years.
  3. By the time the warranty becomes effective you may have lost, sold, or replaced the item on which you bought the warranty.
  4. The warranty does not typically cover normal wear and tear, rough handling, or in the case of some electronics – actually dropping the equipment – which in reality are the major causes of defects.
  5. The cost of the warranty is astronomical compared to the amount of money the retailer actually pays for the real repairs.  Some experts suggest that less than 20 percent of all extended warranty monies collected by the retailer are paid out in repairs.  The rest is profit.
  6. Sales people are normally paid a huge commission for intimidating you into saying yes to extended warranties.

Many people fall for the extended warranty pitch because of the high pressure nature of the sale.  They have a feeling of satisfaction and relief after making their decision to buy an expensive item, and they are just about to close the deal when the sales associate mentions the extended warranty.

Some people just nod and agree to add it onto the bill because they just want the process to be over.  And most people will buy anything that seems to contribute to peace of mind or a sense of security, with no idea of how to calculate value.  I’ve actually heard of extended warranties being sold on batteries!

Back to my experience, last week I received a phone call from the same retailer advising me that my manufacturer’s warranty was set to expire in a few weeks and they wanted to let me know that they could still offer to take my $300 to extend the warranty another 2 years.

I’m no television expert, but the moment I set it down on the TV stand and plugged it in, it’s staying put and is not likely to break down on me.

Again, I kindly told the retailer that I wasn’t interested in their generous offer.  What are your thoughts on extended warranties?

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24 Comments

  1. Sustainable PF on December 8, 2010 at 7:52 am

    I’d also like to add that many major credit cards have additional warranty on purchases as well. So use your card wisely. Reap the “rewards” from the card, which may be cash, gas or air miles – but also that extra purchase protection. Then pay the card off at the end of the month! Win-Win-Win!

    • Echo on December 8, 2010 at 7:56 am

      @Sustainable PF
      Good call! The extra purchase protection that some credit cards have built-in can save you big time. My questions would be, how easy is it to activate, and what is the process for actually claiming repairs?

  2. schultzter on December 8, 2010 at 8:26 am

    For a TV that doesn’t move around much I would tend to agree that an extended warranty is pure profit for the merchant (and pure loss for the consumer).

    But for more mobile electonics I’ve often purchased and made good use of the extended warranty! Granted you often have to play dumb and insist “it just stopped working” without revealing why (and hopefully it’s not obvious either – tire tracks across the face of your iPod are a give-away).

    The thing is a lot of credit cards offer extended warrant protection now as well, for free, so it’s worth checking what you get from your credit card vs. what the retailer is offering.

    • Echo on December 8, 2010 at 8:41 am

      @Schultzer
      Yes, the tire tracks would be a dead give-away indeed! Again, I agree that consumers can make good use of their credit card offering extended warranty protection…however people are lazy and they need to understand if they have to register the item with their credit card company once they’ve purchased it, and they need to understand how to claim the warranty as well, otherwise they won’t bother.

  3. Danny Masterson on December 8, 2010 at 9:04 am

    while most of the points made here are very good and valid, bear in mind that yes, the extended warranty is of little value….. until you need one.

    • Echo on December 8, 2010 at 10:13 am

      @Danny
      Fair enough, the same can be said for most types of insurance. I guess my point is that if an item is likely to break down, it will occur during the first few months of ownership while the manufacturer’s warranty is still in effect. And like some of the other comments suggest, your credit card can offer extended warranty coverage free of charge.

      How many people actually buy extended warranty and then fail to claim it down the road if the item breaks? The profits for the retailer are huge. In terms of value, the extended warranty this retailer offered to me cost close to 40% of the purchase price. That’s a big premium to pay for peace of mind. No thank you.

      • schultzter on December 8, 2010 at 10:42 am

        I agree something purely electronic will fail very quickly if it’s faulty. But something with a mechanical component, even as simple as a button, can take time for the inherent fault to become apparent. Not to mention assembly, ex.: a loose screw holding an IR transmitter, can take time to affect the device. I would expect a one year warranty is long enough, but be weary of a 30 or even 90-day warranty.

        In the case where the manufacturer offers a very short warranty then a retailer’s (or credit card’s, but they’re usually just doubling the manufacturer’s warranty) extended warranty could be worthwhile (although so could buying a better quality product). I think the term is moral hazard but if the manufacturer doesn’t believe in their product then retailer is really going out on a limb if they offer an extended warranty at a reasonable price.

  4. Danny Masterson on December 8, 2010 at 10:13 am

    Another consideration, is that if you could place that same $300 warranty cost into a savings account. After that manufacturer’s warranty expires in a year’s time (some are longer) the TV, should it “blow up” the day after that warranty expired, has already become obsolete and terrific bargains for the same TV will probably be abound, and guess what….. about a year ago, you placed that $300 into savings for just this purpose PLUS a minimal amount of compounded interest. If the TV lasted for 5-6 yrs, as most do, you would be able to purchase one for less, still. (maybe you could add a couple of bucks per month to that “TV savings account” and upgrade at that time.

    Another thought….. if you cannot afford to pay cash for the TV, then you don’t need it now. Save up until you have the purchase price available and save on NOT paying the enormous finance charges that these applicance stores and credit card companies charge.

    • Echo on December 8, 2010 at 10:21 am

      @Danny
      Yes, I completely agree with the idea of setting aside the money in a savings account as I believe everyone should strive to become self-insured when they can afford to.

      As for financing the purchase, the retailer offered a free “don’t pay for a year” that did not include any up front fees, so we took that offer and paid the balance in full before the interest-free offer expired. I would never pay the 28% or higher fees associated with the retailer’s financing.

  5. Danny Masterson on December 8, 2010 at 10:26 am

    Most of those “no payments for a year” or “no interest for a year” are banking on, much like the warranty companies, the fact that most people will not pay off the balance in the specified period of time, or miss a payment or make a payment late, along the way, which usually makes them subject to some astronimcal fee, or accumulated interest. Once that accumulated interest hits, your balance may have effectively doubled and could possibly alter your repayment arrangement. Read the fine print

    • Echo on December 8, 2010 at 10:29 am

      @Danny
      I admit that I was a bit nervous about “something” happening to my payment…so I made sure to pay off the balance in full a good three weeks prior to the expiry of the deal 🙂

  6. Danny Masterson on December 8, 2010 at 10:32 am

    (I hit send before I was ready)….. and while this article is not about financing, you must also read the fine print on these so called warranties, or more appropriately, service agreements (only the original manufacturer can “warranty” an item). If you are so inclined to purchase one of these little jewels, know who in fact is backing this agreement. Are there some form of maintenance requirements in order to keep the service agreement “valid”; in other words, are you required to pay for maintenance or “check-ups”. Kinda like the requirement to change your oil every 3 months or 3000 miles for your auto service contract. (This is also a requirement for the automobile manufacturer’s warranty – but at longer intervals)

  7. FB @ FabulouslyBroke.com on December 8, 2010 at 10:40 am

    1. Fine print: Read it. Sometimes what you think is covered under the warranty isn’t really covered.

    2. Consider the item: If it’s a USB key and it doesn’t die with 30 days, it probably won’t die any time soon. I use this same logic for pretty much anything I can return for a refund in 14-30 days, after heavy usage/testing

    If it’s delicate, perhaps not.

    I never buy the warranty. The manufacturer’s warranty is usually enough to cover me, but then again, I learned my lesson on cheap brands. (Read: Don’t cheap out).

  8. Ian Brennan on December 8, 2010 at 11:53 am

    Nobody has mentioned problems in collecting on an extended warranty. In today’s financial climate, we need to think about whether the warranty company is going to be around in another 3 – 5 years. It has happened to me!

    On the subject of financing – be careful of admin fees/membership fees. In most situations in which I have been tempted to take the interest free deal, the admin fees end up costing more than the interest would have for the same interest free period!

    • Danny Masterson on December 8, 2010 at 12:17 pm

      Good point, Ian –

      Most reputable service contracts will be “guaranteed” by an insurer, for that very reason. If the service contract company goes “belly up” for some reason, payments for claims will be guaranteed. Getting a claim approved by an insurer, is a whole other story. Many times the service contract may be offered by the manufacturer, (i.e. GM offering GM Platinum Care, etc), and with large corporations like that, there generally isn’t much chance of default (although nothing is guaranteed in life). Don’t be duped into thinking that because it’s being offered by that manufacturer’s retail distributor that it is a manufacturer’s service agreement. It must display the manufacturer’s name on it and be explicit that it is covered by the manufacturer as an extension of the original manufacturers warranty, or something along that line.

  9. youngandthrifty on December 8, 2010 at 11:25 pm

    A lot of the retailers advertise that they are “no commission” e.g. Best Buy but the staff that sell you product get commission only when they sell warranties.

    I don’t buy the warranty either, though I did in the past (when I succumbed to their high pressure sales tactics aka bullying!)

    • Echo on December 9, 2010 at 1:05 am

      Good for you Y&T! You have to think that if the retailers are going to really go out of there way to push their extended warranty, it must be a huge profit for them and maybe not such a great deal for the consumer.

      And I would say that calling the manager over to bully you, and having their head office call centre phone you before the manufacturer’s warranty expires qualifies as “going out of their way”.

    • dayton on February 23, 2012 at 1:25 pm

      bestbuy Staff do not get a commission from warranty sales, trust me! and like buudy said above you all think warranties are crap untill you need it, then you’ll go into the store and scream your head off and want a new one. Fair enough if you people dont want to be helped, facts are that electronics are made cheaper every year and I myself have had to use them many times. sure its not needed on everything, but tvs and computers are a must! these things are crap, really expensive to fix and seem to be lucky to get 4years out of them (the typical warranty term) And to the main guy above all extended warranties come into play immediatly from purchase, because a good warranty will cover things the manufacture wont ie. accessories

  10. Jason on March 18, 2011 at 8:46 pm

    I have to tell you I bought an extended warranty for my 32 inch Sony Bravia in august 2008 and 2 weeks ago the lower half of the screen became a blurry mess. So I called Geek Squad because I bought it at Best Buy. After coming out to look at my tv they said they didn’t have the required part to fix it and a couple days later gave me a confirmation number to take to Best Buy along with my old tv. I went today and they replaced my old tv with a newer better tv free of charge. The warranty really saved me big time.

    • Echo on March 19, 2011 at 8:45 am

      Hi Jason, thanks for sharing. I’m glad to hear a success story from a customer using their extended warranty.

      Did you feel pressured to buy it at the time?

  11. selena on March 23, 2011 at 12:13 pm

    i think danny makes a good point about putting the money in an account instead. that way if it breaks you can probably pay the whole repair out of that account. if the damage is beyond repair you’ll have a head-start in saving up for the next tv.

    in the past i’ve bought some extended warranties, but on the rare occasions something did break it either wasn’t covered by warranty or i didn’t bother to check.
    so it’s just not worth it for me.

    i understand why someone would want a warranty for a phone or iPod., those things actually break. my problem with those insurances is that the premium is based on the average damage of both you and that dude we all know who is bragging at every party how he managed to ‘break’ his phone just before the warranty expired and got a brand new one.
    if you are not terribly clumsy you’re cheaper off in the long-run by setting aside some money and pay for replacement out of your own pocket.

    • Echo on March 24, 2011 at 10:38 am

      @selena
      That’s a good point about the premiums being higher due to the people who abuse this type of coverage. I do agree that you would be better off in most cases just setting aside some money in a savings account to cover any potential expenses.

  12. UltimateSmartMoney on October 13, 2011 at 7:36 pm

    I never got in the habit of getting extended warranties. I still think it is waste of your money. However, I know some people are glad that they got extended warranties because they end up using it. I never get them because they are too costly.

  13. MikeO3 on December 1, 2011 at 8:43 pm

    Never ever do I buy and extended with the exception of a laptop AND only if I can negotiate down to 7-8% of the devices overall value. Anything outside this is not worth it because of the manufacturers warranty and frankly if it breaks in a couple of years it was probably time to upgrade anyway!

    I have never had a TV breakdown on me except dying a slow painful death from old age. Knock on fake plastic grainy wood.

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