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?)

IN PICTURES: 6 Worst Financial Mistakes And Why You Made Them

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.

IN PICTURES: 5 Ways To Trick Yourself Into Saving Money

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.)

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Under Armour's Plan to Double Revenue

    Learn how Under Armour plans on doubling its revenue by 2018. Find out what areas the company plans to count on for this growth and its record streak.
  3. Taxes

    Internet Sales Tax Vs. Brick & Mortar Sales Tax

    Learn about the differences between sales taxes and Internet sales taxes, and the goods and services that typically incur each type of tax.
  4. Entrepreneurship

    How an Internet Sales Tax Will Affect Your Small Business

    Learn about how the Marketplace Fairness Act may impact small business owners should it pass in the House and what the act requires from business owners.
  5. Savings

    Craft Beer Clubs – Bargain or Not?

    If you're an aficionado of artisanal brews (or would like to be), a beer club can be a palate-pleasing, albeit pricey, way to expand your hops horizon.
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Stock Analysis

    Has Urban Outfitters Lost its Way? (URBN)

    Urban Outfitters just made a bold move. Will it pay off?
  8. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  9. Savings

    Are Wine Clubs Worth It?

    Some points to consider, before committing to a membership for yourself – or as a gift. The right club can also help you save money over the holidays.
  10. Stock Analysis

    Kohl's: Should You Stock Up or Sell? (KSS)

    Many traders are bearish on Kohl's, but long-term investors might want to take a closer look for this simple reason.
  1. Does QVC accept debit cards?

    QVC accepts debit card payments as one of its many payment options. The company, which is the world’s leading video and e-commerce ... Read Full Answer >>
  2. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  3. Can you pay off a Walmart credit card in store?

    Wal-Mart Stores, Inc. (NYSE: WMT) allows multiple payment options for its credit cards, including in-store payments. The ... Read Full Answer >>
  4. Does Walmart take international credit cards?

    Foreign visitors to Walmart locations in the United States can use their credit cards issued by banks outside of the U.S. ... Read Full Answer >>
  5. How can I invest in electronic retailing (e-tailing)?

    Electronic retail is one of the fastest growing segments of the economy. Every year, more people are choosing to purchase ... Read Full Answer >>
  6. What is the difference between JIT (just in time) and CMI (customer managed inventory)?

    Just-in-time (JIT) inventory management focuses solely on the need to replenish inventory only when it is required, reducing ... Read Full Answer >>

You May Also Like

Trading Center