Extended Warranties: to Buy or Not to Buy

A reader from Peoria, IL asks, “What is the rule of thumb for when to buy a warranty for your electronics purchase?”

That’s a great question. I have some personal experience in this area, because I worked in sales for a large electronics retail store not too long ago. Extended warranties were one of the things we offered customers (and were told to offer to every customer making a major-ish purchase).^[1]

Electronics retailers make a very high profit margin on extended warranties, which is part of the reason many people with whom I talked were very skeptical of extended warranties.

I personally don’t think you should avoid extended warranties just because retailers make a profit on them. After all, it’s a very similar business model to the one insurance companies use.

However, I do think you should avoid extended warranties, and here’s why:^[2]

Why NOT buy an extended warranty?

Overlap in coverage: The extended warranty starts day one, not after the manufacturer’s warranty expires. If the manufacturer’s warranty lasts one year and you buy a three-year extended warranty, you are actually getting two extra years of coverage, not three. Similarly, if you buy a plan that covers accidental damage, it will also cover product defects, which were already covered by the manufacturer. Why pay for coverage you already have?

Products don’t usually break during the extended warranty window: Consumer Reports’ research indicates that products are most likely to break either during the manufacturer’s warranty or long after the extended warranty has expired. (Not the day after the warranty expires, as some believe.) So IF the product has problems before the end of its expected lifespan, it will most likely be during the first year.

Your credit card might cover you: Some credit cards will extend the manufacturer’s warranty past it’s original expiration. American Express is best known for this, but other cards may have similar benefits. Check the fine print on yours.

Here’s what you should do instead:

Find out how much the extended warranty would cost you, and put that amount of money aside into a dedicated electronics repair fund. After doing this for a few purchases, you’ll probably already have enough saved to cover an unexpected repair or replacement out-of-pocket – and without purchasing an extended warranty. In other words, you are your own insurance plan.

This plan of action may not be easy to implement and keep up, but it’ll allow you to sleep easier at night without spending money on an unnecessary insurance plan.

Leave a question or comment below! Thanks!

1 – Every product comes with a manufacturer’s warranty, generally anywhere from 90 days to 2 years. On major items such as TVs, computers, PlayStations, or cameras, the most common manufacturer’s warranty lasts 1 year. Manufacturer’s warranties essentially cover problems that are the manufacturer’s fault: manufacturing issues, defective parts, etc. Extended warranties are offered by a third party (examples include Best Buy’s Geek Squad Protection, and SquareTrade, which sells their extended warranties online). These typically cover the same things as the manufacturer’s warranty, but may cover other things such as accidental damage. The main distinction is that they last longer, up to 5 years (depending on the product covered).
2 – I based some of my ideas on two different resources: Consumer Reports and U.S. News and World Report