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The truth about extended warranties, and what to do instead
We lose money
For most, extended warranties are bad investments, because we never use the coverage they pay for.
For a warranty to be worth it,
- Something needs to fail that is covered.
- We need to use the warranty during the repairs.
- The cost of the repairs should exceed the price we paid for the warranty.
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Extended warranties
Extended warranties are a product. They help the business more than they help the consumer, as no business offers a product at a loss.
A Consumer Report revealed that 55 percent of owners who purchased an extended warranty hadn't used it for repairs during the lifetime of the policy. Those who did use it spent far more on the coverage than they saved on repair costs.
We lose money
For most, extended warranties are bad investments, because we never use the coverage they pay for.
For a warranty to be worth it,
- Something needs to fail that is covered.
- We need to use the warranty during the repairs.
- The cost of the repairs should exceed the price we paid for the warranty.
A better approach
Instead of buying warranties, consider setting up your own warranty coverage by putting the money aside in an interest-bearing savings account. Then you have full control over the money and can re-purpose those funds.
This strategy will work in your favor more often than it won't. Consider setting aside about half of the cost of the item you bought.
Considering an extended warranty
Before accepting an extended warranty, ask yourself:
- How likely is it for this thing to break? Search online reviews to find out. Remember that the manufacturer's warranty is often sufficient.
- Would depreciation make buying a new one worth it? An extended warranty might not be worth the value.
- Do I know exactly what is covered?
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