Remember your recent electronic purchase when the salesperson said, "we highly recommend protecting your item with our store's extended warranty package that will cover all repair costs incurred within three years"? More often than not you get sucked into buying the package, as the investment in the electronic item is huge. But will you get the best returns? Chances are little to none. A recent Consumer Reports article released in December 2010 labeled extended warranties as bad deals in general and suggested buyers avoid them. (For more, see Extended Warranties: Should You Take The Bait?)
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Manufacturer Warranty vs. Extended Warranty
It seems as though almost every electronic item comes with an extended warranty plan that acts like an insurance policy, promising to cover all your repair and damage costs for a particular period of time after your purchase. How can that be a bad deal? In most cases the appliances you buy come with a manufacturer warranty that will cover your repair cost for a year. In that case, your retail warranty plan will more or less be a waste at least for the first year.
Minimize Your Losses
On an average, the frequency of repairs on electronic appliances, such as a GPS, probably won't occur at all. Studies and surveys conducted by Consumer Reports show that it is most likely a consumer would identify a glitch with the product either very early on or years later when the item starts to wear out. In case of an early damage, the product will be under the return period of the retail store.
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Spend Later than Before
You may buy a new car after watching the auto show in the city and decide to purchase the extended warranty plan with it. Chances are you will find yourself in a bigger loss when the repair cost of the damage will be lesser than what you paid for the plan. Sixty-five percent of the 8,000 Consumer Reports readers said that they spent way more on these plans than they got back on repair-cost saving.
Don't Miss the Fine Print
Once you have decided to purchase a warranty plan for your item, don't forget to get all the details of the coverage. A bad package would often have a large number of exclusions, the consumers would be expected to pay out of their pocket for certain repairs and their definition of "damage" might be different. Additionally, it's always a good idea to check the company's customer service track record before buying the plan. (For more, check out Did You Buy A Lemon?)
What Does the Retailer Get?
The retailer is not in for a great profit when you decide to buy the LCD Plasma television with speakers on sale. But they intend to turn around their profit through the extended warranty that they will sell you. The December 2010 Consumer Report article observed that two of every three in-store shoppers were offered to buy the extended warranty and one in every eight in-store customer actually bought the warranty. The percentage of profits vary, but retailers make as much as 50% profit.
Cheating or Selling?
However, retailers don't cheat you, they just sell you, said Jan Rogers Kniffen, CEO of J Rogers Kniffen WWE, LLC, a consulting firm in the retail sector. Kniffen believes that warranties are not bad; they are just expensive.
"You as a consumer will price comparison shop for the TV, but once you are buying the TV you will not price comparison shop for the "gold plated" HD cables, or the extended warranty, so the retailer has the opportunity to make a healthier profit on those items," he said.
While most of these extended warranties may not serve you well, you should certainly consider purchasing warranties on certain items, such as, laptops or a rear-projection TV. For instance, a rear-projection TV's light-bulb will live for about 5,000 hours after which a replacement would cost you $200-$300 - close to the cost the warranty plan that includes bulb replacement. (For a related reading, see Consumer Protection Laws You Need To Know.)