A Get Rich Slowly reader pointed to a Washington Post article about extended warranties. “Unwarranted” discusses the psychological reasons consumers buy these products, explores industry profitability, and emphasizes that most experts recommend against purchasing extended service contracts.
The decision to buy an extended warranty [...] defies the recommendations of economists, consumer advocates and product quality experts, who all warn that the plans rarely benefit consumers and are nearly always a waste of money.
“The things make no rational sense,” Harvard economist David Cutler said. “The implied probability that [a product] will break has to be substantially greater than the risk that you can’t afford to fix it or replace it. If you’re buying a $400 item, for the overwhelming number of consumers that level of spending is not a risk you need to insure under any circumstances.”
Why are extended warranties a poor idea?
- They are not warranties. They are “insurance products on which the premiums are paid in a lump sum at the time of purchase”. They are backed by a third-party insurance company, not by the manufacturer.
- Repairs performed under an extended warranty are generally performed by contractors selected by the insurance company. “Many policies do not cover accidents or normal wear and tear — the most common causes of breakdowns on common household goods.”
- It often costs more for the extended warranty than for common repairs.
- Few extended warranties are ever used because:
- the products don’t need repair,
- it’s a hassle to use one, and
- consumers forget the policy or misplace the information.
According to the article, $15 billion in premiums was charged to U.S. consumers in 2004, of which $7.5 billion went to the stores who sell the warranties. About $3 billion was paid in claims against plans. Only $20 every $100 spent on extended warranties is paid in claims. By comparison, the American auto insurance industry pays $66 in claims for every $100 in premiums.
Reading the latest issue of Consumer Reports — the annual electronics issue — I noticed that it nearly always recommended purchasing an extended warranty. (The magazine recommends extended warranties on Apple products — which only provide 90 days of support — and “for refurbished computers of any brand with less than a one-year warranty”.) Some experts also recommend extended warranties on bulky LCD or plasma televisions.
Obviously, it’s the consumer’s choice whether or not to purchase an extended warranty. For some, the peace of mind is worth the cost. But most people don’t understand how poor a financial decision an extended warranty usually is.
[The Washington Post: Unwarranted]
When you are done with your purchase and want to sell it on eBay, extended warranties may help to distinguish your product from the competition, and/or justify selling it at a higher price. I think eBay buyers like to purchase a secondhand item knowing that if its not working in anyway they can get it repaired for free, thanks to the balance of years left on the warranty. This may mean that you share the cost of the warranty and the risk that the item may malfunction between you and the next owner.
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I always do a simple cost-benefit analysis before I buy the extended warranty. As I’ve learned, there are situations where you’d regret not buying it. I dropped my digital camera, cracking the LCD screen. It actually was more expensive to buy the replacement part than to buy a new, top-of-the-line camera.
You better believe that I got the extended warranty on the new one.
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One of your statements is misleading.
All Apple hardware products come with a 1 year warranty. The “90 days support” applies only to software.
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Charles is absolutely correct. I was relaying the information from the Consumer Reports article, and it’s apparently incorrect. (Or I read it wrong.) Checking Apple’s web site, all hardware comes with a one-year warranty.
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I just canceled my extended warranty on my car after reading several things like this about extended warranties. I agree they are almost always a waste.
But I have an exception:
When I eventually buy a Mac, I plan on getting the extended AppleCare warranty. Mainly because it extends the hardware warranty to three years. That’s a good lifespan for a computer, and if you buy something like an iMac or a Macbook, busted hardware can really screw you in the end. It’s nice to know that if the LCD goes out of a Macbook that you can take it to an Apple Store and get it replaced without incurring extra cost for an already costly piece of equipment. That, to me, is a good use of an extended warranty.
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I’ll preface this by acknowledging that I _never_ buy an extended warranty.
But the argument that “only $20 is ever paid toward claims out of $100 worth of premiums” is specious.
Most extended warranties that stores have tried to sell me are as simple as taking the item back to the store from where you bought it, and they give you a new item (or so they claim).
Compare that to trying to pursue a warranty claim through a manufacturer. In the few cases I’ve tried this It’s required hours of phone calls to the manufacturer, several trips to Fed-Ex, and ultimately I end up with a product that may not be repaired to my satisfaction.
That $20 / $100 figure is for the store, who has low-paid help and good communications with manufacturers. I am relatively highly paid, and it is very hard for me to get in touch with the right people at a manufacturer. $20 worth of effort for Best Buy might be $120 worth of effort for me.
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Noting the 180k miles on my trade-in, the finance folks who were hoping to sell me the extended warrany on my new van told me I was going to drive right out of the factory warranty in less than two years. I declined noting that I’d drive out of the extended warranty almost as quickly. At 4 years and 100k miles on that vehicle, I’d be out of the extended warranty as almost none of them go past 100k miles anyway.
OTOH, I did take the extended warrany on a used car a long time ago. I took that car to the shop for a power window problem. They called with a laundry list of items they wanted to fix. I told them they could do whatever they wanted as long as it was covered by the extended warranty. I think I actually covered the cost of the warranty on that trip, but then all of the other work was really optional in the first place. I just needed my power window to roll up.
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getting the extended warranty on a $400 xbox is silly, getting it on a $1200 refrigerator is a little more sane. on a $2000 plasma tv, I think you would be insane to not get it.
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I’ll chime in and add that AppleCare is a pretty sensible investment. Three years is as long as I’m likely to keep a computer anyhow, and with my first iBook, I had to send it back with some major fault about once a year. It lasted the full three years with only a couple days out for AppleCare (they are much faster than their guarantees), so I was satisfied.
And it’s especially cheap for students.
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AppleCare is WELL worth the $$.
Also, Circuit City has a pretty generous “extended warrantee” package. I’ve bought it to cover damage to digital cameras. The wording states that if the item is no longer in stock, they will replace it with an item of equal value. For digital cameras, this means that in a year (when your camera is no longer in stock), they will give you the orig $ cost of your broken camera towards the purchase of a new model.
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Early this year my three year old Dell Laptop came to the end of the extended warranty. I weighed up the option of whether or not to extended the warranty for another 2-year. In the end I did extend it at a cost of $450.00 (with complete care which covers accidental damage for only $50.00 more).
This sound rather excessive, but with laptops I would say that it is worth it because the parts are usually proprietary and only available from one source.
In my case it’s already paid for itself as I needed to get the motherboard replaced a few months ago, which is insanely expensive on a laptop.
With a normal desktop PC I would probably not worry about an extended warranty, but with a laptop I always recommend it.
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Apples aside–I don’t own one–I would always, always recommend an extended warranty *with accidental damage* on a laptop. Get it for the period you expect to use the machine before replacing it or the longest they have, whichever is shorter. I say this now after having not done it, once. It seemed like the moment my first laptop was out of its one-year warranty, the problems started to stack up, and they weren’t cheap problems to fix. The hinge went so that the top didn’t want to stay open anymore. Somehow, the PCMCIA adapter managed to break off inside the laptop, after constantly putting in and taking out my wireless card. The post in the power jack got loose, which turned out to be the one thing I *could* fix, and for only $40, though nobody was willing to give me instructions to do so. Repair parts alone on laptops are often so expensive that the extended warranty pales in comparison. (When everything’s on the motherboard and the motherboard is $500…)
But laptops are generally rather short-lived and, because they’re portable, not treated so well. For a TV, that I’d be hoping would last me at least ten years, two or three years of additional non-accident protection on an object unlikely to ever move more than three feet in my living room? Probably not worth it, no matter how much the thing cost. Real flaws that’ll be covered by warranty aren’t likely to show up two years in.
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I have to admit that the only products I ever consider extended warranties on are laptops. Like others here, I’ve had some bad experiences. My first laptop, purchased back in 1998, had some real problems after only six months. Unfortunately, the company that manufactured it had gone out of business.
My second laptop — a 1999-era Dell Inspiron — works well even to this day.
My next laptop — an Apple iBook — developed a display problem just out of the one-year warranty. I have to open the screen just a little too wide, otherwise it blanks out. Bummer. Also, I’ve had two iBook power adapters fail on me. The first one failed just inside warranty, and was replaced. The second failed outside warranty. I bought a third-party replacement that has lasted much longer.
My current laptop — an Apple Powerbook — has had no problems, other than the fact that I dropped it once and now the finish/trim is bent and wonky.
I’m going to buy a MacBook Pro next year. Will I get an extended warranty? It’s very, very possible.
But I won’t get one when I get my Wii next month!
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Bill, I’m curious. You can buy a brand-new bottom-of-the-line Dell laptop for $489. This machine may be comparable with your three-year-old as far as the performance specs go (as computers are want to do, we all buy machines only to find they’re well behind the times three months later). Assuming your old extended warranty was a similar price, you’re now at $1,000 for warranties–and $1,000 buys a pretty nice laptop these days.
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all i can say is anyone buying an extended warntee on anything with an lcd screen and thinks its covered better check to make sure. i bought a ppc a couple years ago was assured it was 100% covered. if it broke it would be swapped out in the store for like tech. came in with a broke lcd and was told it wasnt covered. so ask those questions. if the easy to break items are covered then cool but make sure you get it in writing.
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I purchase AppleCare with all my macs (you have the whole year after your pruchase to make the transaction, so it’s not that hurtful).
First, it’s for the usual peace of mind, especially with a notebook whose component might be attached to the mainboard… a mess to repair…
But most of all, it’s because of the resale price: I usually change every 2 year, and thanks to Apple Care, the computer still has a 1 year warranty attached to it, and it’s a MAJOR selling point, worth much more than the residual value of the warranty… (IMHO, I’m not working for – or holding shares of Apple)
Anyway, it’s true for most brands anyway.
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I’d agree that most, especially store bought, extended warranties for electronics are not worth it. (Things with moving parts might be different.) But all warranties are not created equal. The extended Warranty I got on a USD$2800 acer tablet laptop three years ago cost just USD$120. At that ratio it was well worth doing.
Just before the three years was up it started getting cracks in the bezel around the screen. They not only replaced the bezel but also sorted out a couple of other minor problems that had bothered me but not enough to send it in before. Took them a week and at three years old the thing is like new. Really glad I did get that one.
So just keep your eye open for the exception that proves the rule.
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another option for fixing laptops, if you are handy with computers: buy a broken one on ebay that is a similar version and cannibalize parts from it. Sometimes you can get it for really cheap, pull a perfectly good part from it, then sell the rest back on ebay as a broken laptop. Of course, you have to be willing to poke around in your laptop, and that will certainly void any warranty you do have (but you don’t, that’s why you are getting a broken one on ebay to cannibalize). In theory, this would also be more environmentally responsible, rather than manufacturing new parts.
This works with cars sometimes too, if you are at all handy and have tools, and a nearby junkyard, and the thing that is broken is something not crucial to the movement of the car (say a broken antenna or whatever)
There’s a surprising amount of things you can fix yourself for cheap if you do a little digging.
Full disclosure: I am handy with computers. With cars…not so much.
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[...] The machine is two years old. I don’t have an extended warranty. Some sort of gasket inside the slot-loading drive seems to have come loose and worked its way inside with the CD that I was using to install a wireless keyboard. Now I may need to have this machine repaired. Will the repairs cost more than the extended warranty would have? Possibly. [...]
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Some credit cards will double the warranty period up to a maximum of 1 extra year on purchases.
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Actually, NOT getting the warranty on a $400 Xbox 360 is insane. Launch electronics (especially video game consoles) are known to have a high return rate. While Microsoft has stated that they have only had the standard ~6% return rate rumor/speculation polls have put it in excess of 50%. I for one have had 5 friends who bought “launch” consoles of those only 1 still works, o of my small sampling of friends there was a 80% defect rate.
Now the warranty on an xbox 360 is $40 (from Microsoft) if I remember right and the cost of getting one repaired is about $120 making the extra $40 you spend a worthwhile investment if such a high defect rate actually is true.
In reality though the 360 comes with a 6 month warranty out of the box which for launch units about 3 weeks ago it was extended to 1 year, which actually probably means you don’t need the extended warranty anymore.
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I have personally used the warranty doubling feature of my Amex to get my Powerbook repaired–it worked great, probably better than Applecare. I never buy extended warranties because of this credit card feature.
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If you are considering AppleCare on your Mac, check out http://www.lacomputercompany.com/. They have significant discounts on AppleCare. For a MacBook Pro, it’s over 25% less, 28% less for a MacBook.
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[...] Here’s a great comment from a new reader: I just found this blog today, and I’m really confused. The title seems to suggest that this is a blog of good advice for people trying to save money and be thrifty. Overall, though, it seems the posters just end up in the same pitfalls and unpleasant surprises as anyone else. Viz the recent pair of postings of “don’t get an extended warranty” followed by “crap, my non-extended-warrantied laptop just broke.” Likewise, here we have a story about new homeowners who are intelligent and took the time to do some due diligence and still got screwed in the end. It doesn’t seem that the posters’ own experiences encourage the following of the posted advice here. [...]
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I think you need to put an addendum on your article specifically related to laptops. I’ll join the chorus of readers who believe an extended warranty (with accidental damage coverage!) is well worth the expense. Laptops are delicate, finicky, expensive-to-repair items that take heavy use.
That said, don’t buy into the popular superstition that not purchasing the extended warranty is asking for trouble. Do the cost-benefit analysis. If a year from now, I drop my $150 cell phone and it dies, I’ll buy a new one. That’s why I put aside money for unexpected expenses (and try not to drop it!). If I bought insurance from my cell phone company, and I dropped my $150 cell phone a year from now, I’d already have paid for a new one – just in installments.
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Here’s my history with extended warranties I purchased:
iCN510 GPS: never used the warranty.
PowerBook G4: never used it but considering the life (and replacement cost of parts ($250 alone for new case) I will buy again.
MacBook Pro: still inside 1 year.
Audi A6: two months after declining an extended warranty priced at $3,000, my torque converter stopped working – dealer cost to repair $3,000 and probably half that elsewhere. My torque converter is still broken right now.
Xbox 360: bought 3 year warranty and inside 1st year the console broke (RROD).
My father bought an AppleCare warranty for his MacBook and about a year into it needed to replace the hard drive.
I rarely buy extended warranties but I’ve had a positive experience thus far.
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