Are Warranties a Waste of Money?

Nov. 13, 2006 — -- This holiday season, consumers will spend about $1.6 billion on extended warranties.

Americans shell out as much as $400 per appliance to cover purchases like flat-screen TVs, washing machines and refrigerators.

But are pricey warranties worth it for consumers?

Tod Marks, senior editor of Consumer Reports magazine, says no. Consumer Reports recently surveyed extended warranties and found that they weren't worth the cost.

"What these are, are very expensive insurance for products and repairs that you can usually cover out of pocket. It's not health or auto insurance, which covers you for catastrophic loss that you couldn't cover out of pocket," Marks said.

Marks explained that buying an extended warranty was like making a series of risky bets.

"You're betting it's going to break at exactly the time period between when the manufacturer's warranty expires. … You're also betting that the cost of the repair will be more than the cost of the warranty." he said. "You're also betting that you'll want to get it fixed. Technology advances so quickly that new features, dropping prices, better products may mean it's preferable to buy a new item rather than fix the old one."

Worth the Warranty

There are a couple of cases where the extended warranty makes sense.

DLP TVs

Rear-projection microdisplay televisions, more commonly known as DLP sets, have high repair costs and are three times more likely to need repair than other TV sets. They also have a tendency to die prematurely, and the part that dies -- the light bulb -- is expensive to fix. Most extended warranties cover the cost of one bulb. For heavy TV-watchers, the warranty might be worth a look.

Apple Computers

Apple, the maker of the popular iMac and iBook computers, only offers free tech phone support for 90 days. After that, each call costs $49. Consumers who anticipate needing any sort of tech support after three months may as well buy the extended warranty.

Warranty Probably Not Necessary

A few items covered in the Consumer Reports survey needed a lot of repairs, but Marks said that still didn't justify getting extended warranties.

Non-Apple Computers

Laptop computers and PCs required more repairs than anything else. Most of the time, though, repairs happen after the extended warranty expires or are not covered by it.

"For example, if you spill a cup of coffee on your laptop -- that isn't covered," Marks said.

Kitchen Appliances

Kitchen appliances also require a lot of repairs. For example, icemakers on side-by-side refrigerators can break down, but the cost of repairing an icemaker is about as much as buying the extended warranty. The warranty just means shelling out money up front for a repair that may not be necessary.

Forget the Warranty

For some purchases, consumers should reject extended warranties without hesitation.

Digital Cameras

"Digital cameras are one of the items you need not worry about purchasing a warranty for because less than 10 percent of all digital cameras need repair during the first three years after purchase," Marks said.

"Odds are you won't ever have a problem with your digital camera, and should that happen it will be well beyond the time covered by warranty."

Save Up for Repairs -- or if a Warranty's a Must, Use It to Bargain

Marks suggested a few tips for shoppers who want piece of mind about repairs.

"Take the money you'd spend on a warranty and set up a rainy-day repair fund. That's a smarter way to do it," he said.

Look into perks offered by credit cards. Many gold- and platinum-level cards will lengthen manufacturers' warranties for up to one year.

Marks said if consumers really wanted to get a warranty, they should shop around before settling.

"Check to see what different retailers offer and never pay more than 20 percent the purchase price," he said.

"Also, ask the right questions to avoid hidden 'gotchas.' Does the warranty include in-home repair or pickup of the product? Otherwise you may find yourself having to transport a 200-pound television to the service center," Marks said.

Finally, Marks said to use the purchase of a warranty as leverage.

"Use the fact that you're going to buy a warranty as leverage," he said. "Say 'I may consider the warranty, but it's expensive. Can you negotiate or give me a year for free?' Use it as a bargaining tool. All they're doing is selling paper."