Extended-Service Plans: Worth It or Worthless?

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It’s almost impossible to enter an electronics store these days without having to undergo the sales pitch for the establishment’s extended-warranty service. Sometimes the answer is easy—no, I don’t want a service plan for my $30 toaster. But it’s a little tougher to resist the temptation to protect bigger items. What happens if my new digital camcorder breaks? What about that new laptop? The washing machine? Without the skills to repair our own gadgets and gizmos or the money to replace them, people naturally want to buy the protection that comes with these extra warranties. But while you may be buying peace of mind, you might not be buying a warranty worth its salt.

A Boon to the Bottom Line
Stores offer these service plans because they constitute a huge profit—sometimes even a bigger profit than from the item itself—and they’ve become a huge chunk of retailers’ incomes. In 2004, 50 percent of Best Buy’s operating income came from warranty sales, according to Consumer Reports, and Circuit City’s warranty sales made up nearly 100 percent of its operating income. Since the stores make far more money on selling the warranties than they spend servicing them, they’re a great deal for retailers. For consumers, however, they’re not so useful. Consumer and financial experts say that in most circumstances, the extended warranties just aren’t worth it.

When customers buy an extended warranty, they’re betting not only that their new product will fail, but also that the cost of repairs will be higher than the cost of the warranty. Consumer Reports found that the plans are largely a waste of money because the majority of products don’t fail within their first few years of use, and even when something does break, the fine print on these contracts sometimes makes it difficult to actually get the item fixed or replaced.

Most service plans are redundant, because their coverage overlaps with the existing manufacturer’s warranty. Small electronics are usually covered for a year, and larger purchases can be covered for up to three years. Electronics experts report that defects often manifest themselves right away, so the few products that are going to break usually do so within a year, and those that don’t fail typically function reliably well for several years. When a product does malfunction, many warranties don’t help, because they’re specifically written to exclude the most common problems or are so vaguely written that the company can try to justify not paying for almost any reason. If the company does pay up, all service and repairs will be at its convenience, not yours. The warranty company can require you to drive to a repair shop a hundred miles away, send in your item for repairs that could take weeks, or wait for weeks even for an appointment with a technician. Many consumers have found that since abiding by the terms of their warranty is such a headache, they would rather just spend the money having the item serviced themselves at a shop they trust.

When to Save, When to Splurge
There are a few instances in which it might be prudent to invest in a service plan, as long as you’ve done your research. When purchasing large appliances, such as washing machines, stoves, refrigerators, or televisions, or other expensive items that you plan on having for a long time, the extra protection could prove useful. In general, most consumer electronics today have very low failure rates, but Consumer Reports found that desktop and laptop computers have some of the highest, so a service plan on these could save you some money in the long run. And for mobile electronics, like smartphones or PDAs, which are far more likely to be lost or damaged, a plan that covers replacement is probably a good bet.

In general, if you’re buying an item that you could easily replace, such as a computer peripheral, digital camera, or microwave, a service plan just isn’t worth it. It’s also probably not a good idea if the item’s useful life is only a few years. What’s the sense in having a four-year warranty on a camera that will last only three?

If you’ve decided that your purchase merits an extended warranty, do some basic research before you buy. Make sure to read the terms of the warranty, and to know exactly what situations are covered and what are not, where the service or repair will take place, and any costs you might be responsible for, like shipping or a deductible. Know whether the coverage starts immediately and overlaps with the manufacturer’s warranty, or whether it kicks in only after the original warranty runs out. It’s also important to be aware of whether the warranty includes any regular or preventative maintenance, which could be valuable. Warranties that provide for no-questions-asked replacement are some of the best bets. Although the manufacturer could replace a faulty item for free, it may be worth it to you to spend a little extra money and know that you’ll have the convenience of an immediate replacement instead.

It pays to shop around, because not all stores offer the same warranties for the same price. By comparing prices and benefits, you could find a different store selling your item with a better warranty plan. Some warranties are also available through the manufacturer and might provide better, more efficient service than warranties retail stores sell. Finally, check the terms of your credit card, because many have the benefit of extending manufacturers’ warranties for up to a year. American Express cards, along with many rewards Visas and MasterCards, will reimburse cardholders for repair or replacement expenses for purchases made with the card. You may have to pay the costs up front and submit receipts to the company, but it could ultimately save you money.

Whether to buy an extended warranty is the consumer’s decision. The reality is that sometimes electronics do fail, and sometimes repairs are expensive. Just as some consumers feel cheated by their warranties, some report that they’re glad to have them. If you’re reluctant to buy a warranty but don’t want to be left with a lemon, do what the experts advise: take the money you would have spent on a service plan and simply put it into a savings account to use for repairs.


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