Money Down the Toilet for Security
| October 16, 2009 | Posted by Roshawn Watson under Uncategorized |
Most extended warranties are a waste of money for the purchaser and a profit center for the issuer, yet consumers still flock to them. Unfortunately, the extra security provided by the warranty comes with a hefty price tag.
Extended Warranties are Abundant
Sometimes it seems that you can obtain an extended warranty for just about anything. They’re certainly widely available for most cars (new and used), appliances, cell phones, computers and other electronics. They are big business too. Consider that in 2006, consumers spent an estimated $1.6 billion on extended warranties. Functionally, getting an extended warranty is purchasing insurance for a product.
The problem is that these extended warranties are just a waste of consumers’ money for the vast majority of items. The companies issuing the extended warranties are banking on the fact that consumers probably won’t even use the extended warranty, and they’re right. The Consumer Reports National Research Center documents the ownership experiences of millions of consumers for thousands of products. This is how Consumer Reports knows which brands are more repair-prone than others. Anyway, their research shows that most products seldom break within the Extended Warranty window — typically three years — and that when electronics and appliances do break, the repair often costs about the same as the cost of the warranty. Additionally, the warranty departments are huge profit centers for the issuing companies. Extended warranties can reap a whopping 50% margin or higher, which is often well more than the profit on the product being sold. That profit is made off of consumer’s desire for security, but it is just not worth it.
Just Say No
It’s their bottom lines that companies are thinking about when they are pushing those extended warranties not your happiness with their product. I was upgrading my phone six months ago, and the overall experience was low pressure except for when my salesperson got aggressive because she wanted me to purchase an extended warranty. In the end, I held firm and informed her that I would simply self-insure for the phone. She told me I would live to regret it, which I found comical. The truth is that my repeated refusal to purchase these extended warranties for my cell phones alone has more than paid for the price of several phones. In other words, I’m already ahead of the “warranty game” financially.
There was a time two years ago when I thought that I broke my palm, so I went to Circuit City to replace it. They queried me about fixing my existing one. Interestingly, they told me that even if I had purchased an extended warranty, it would have expired a few months earlier. Recall the expiration of warranties before they can be used is often the case for many consumers, which is why extended warranties are a bad product. Of course, getting that warranty from the presently defunct Circuit City would have given me indigestion too. Fortunately, it all worked out.
I have many other examples, but my point is I cannot think of a single case where I wished I would have purchased an extended warranty. I would have lost money with no added value each time.
A Note About Extended Car Warranties
Interestingly, extended appear to be on the rise. Consider that in 1999 23.5% of car buyers purchased extended warranties, and in 2009, that number has soared to 34.4%. According to the National Automobile Dealers Association, these warranties are an important source of profits for the dealerships and are typically more profitable than selling the new cars themselves. Perhaps even more vexing is that sixty-five percent of the respondents Consumer Reports surveyed said “they spent significantly more for the new-car warranty than they got back in repair savings” (WSJ, 2009)
Consider that the next time you’re tempted to waste money on an extended service contract. The better strategy is to 1) purchase quality products and 2) put the money that you were going to spend on the extended warranty into your repair savings. That way, when it is time to repair or replace the product, you will already have money set aside to do it. If you don’t need to repair it, then you’re still ahead.
In short, don’t waste any more of your money on extended warranty. Purchasing one would be the real decision that you would live to regret.
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Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.
I never really thought about it that way. I guess in some cases they can be important (i.e. if you don't trust the quality of the product).
Michael,Although I would never say there is never a good reason for these extended warranties, even in the example you just mentioned one could argue why would you buy a product whose quality you don't trust.