Extended Warranties: Should You Take the Bait?

The next time you make a substantial purchase such as a washing machine or television, you may find that the retailer tries to sell you one more thing at the register: an extended warranty for your new product. By offering coverage beyond the length of the manufacturer’s original warranty, these extended protections often appeal to thrifty consumers who make exacting decisions when buying expensive items.

When you’re pulling out your wallet to pay for a big-ticket item, it’s hard not to be tempted by the extended warranty sales pitch—even if it increases the cost of the purchase by hundreds of dollars. But are extended warranties actually worth it? In most cases the benefit of these contracts begins to disappear when you factor in their cost and the relatively small odds of actually redeeming them.

An Extended Warranty Is Insurance

An extended warranty, or service contract, works like an insurance contract for the product you purchase and is typically sold by the retailer at the point of sale, although it’s often possible to buy one afterward from third parties. While the price of an extended warranty often seems like a bargain compared with the steep price of repairs, it’s important to realize that retailers and other providers offer warranties for a simple reason: They make them money. 

Companies use probability metrics to calculate the likelihood that your new refrigerator, flat-screen television, or car will require repairs. This figure is weighed against how much those repairs would cost, on average. Needless to say, the company offering the policies is looking to come out ahead. Extended warranties can be big moneymakers for retailers. According to data from Allied Market Research, the global market for service contracts reached $120.8 billion in 2019 and is projected to hit $169.8 billion by 2027.

But Do You Need That Insurance?

Warranty providers know that in most cases you won’t actually need the coverage they offer. According to Consumer Reports, about 40% of new refrigerators will need a repair within their first five years of use. That percentage is even smaller for other categories—it’s 30% for dishwashers, for example, and 20% for clothes dryers.

When there is a problem with those products, the consumer organization says the price of an average repair is no more than the cost of the warranty. Certainly, some shoppers experience unusually pricey defects and end up happy that they bought extra coverage, but they’re the minority. That’s why experts often advise consumers to consider carefully whether a warranty is necessary before handing over their money. “Today’s appliances are fairly reliable,” Dan DiClerico of HomeAdvisor.com told Consumer Reports in 2018. “The chance that your refrigerator or dishwasher actually needs a repair during the extended warranty period is pretty low.”

There may be exceptions where paying for extended coverage makes sense. For example, smartphones tend to take a lot of abuse because they’re carried virtually everywhere. Some consumers may find that a service contract on their device provides peace of mind.

In the majority of cases, though, you’re likely better off putting a few hundred dollars into a savings account for future repairs or the purchase of a replacement. One advantage of “self-insuring” is that, unlike a warranty, your account won’t expire. It’s also a good idea to look for brands that have a reputation for quality, which helps minimize the risk that you’ll need to have your purchase fixed for several years. 

What’s Really Covered?

Many products come with a standard manufacturer’s warranty free of charge. This warranty is often good for the first year or first few years of the product’s life. Extended warranties, therefore, often provide overlapping coverage that may end up being unnecessary. 

Even if the product you purchase has a short manufacturer warranty, you may find that the service contract doesn’t provide the coverage you thought it does. Service contracts contain a lot of fine print that consumers don’t always have the time or patience to read through before they sign up. They often limit what parts are covered or contain stipulations involving where you can have the item serviced.

For example, independent stores may require you to bring the device or appliance somewhere local for service. That may not help much if you move to another state.

What to Look For

Should you decide to pay extra for an extended warranty, it’s important to know what it is that you’re actually getting. Here are some questions to ask before signing on.

• Is it likely to need repairs? Some electronics rarely create problems during their first few years of use. Researching dependability data from sources such as Consumer Reports can help you decide whether the risk is substantial enough to justify the cost of a service contract.
• What does the agreement cover? Consumers are often surprised to find out that the components most likely to go bad aren’t actually covered by the add-on warranty. Some companies also insert language that gets them off the hook if you modified the product in any way or didn’t perform routine maintenance. Taking a few minutes to read the details of the contract can save a lot of heartache later on.
• What’s the process for making a claim? Depending on your contract, repair work might be handled by the manufacturer, the store, or a third-party independent company. You’ll want to find out ahead of time. Do you have to take it to the same place where it was purchased, or is there a network of stores or repair shops where you can go?
• Is there a deductible? Even if your repair is covered by the warranty, the work isn’t necessarily free. Check the contract to see whether it requires a deductible or fee-for-service work. You also want to find out if there are any associated expenses, such as shipping costs, that aren’t covered.
• How reliable is the servicing company? A warranty is only as good as the company behind it. Most of the time people buy service contracts from a retailer, but some companies cold-call consumers with offers for extended coverage. If you don’t know the organization’s reputation or feel nervous about offering your credit card information over the phone, it’s better to steer clear.

The Bottom Line

Although warranties may seem like a nice perk that companies extend to consumers, they are actually carefully calculated to be profitable for the companies that offer them. Before you agree to insure your next big-ticket purchase against failure, carefully consider the likelihood that the product will fail, as well as how much it would cost you to repair or replace it. In many cases your best course of action is to bet that your appliances and electronics will outlast the warranties.