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Personal Finance

Are Extended Warranties Worth It?

Updated Aug 24, 2021   |   6 mins read

Are extended warranties worth it? It’s an important question to ask. Lets take a look at when they may come in handy and when they wouldn’t.

When something you own breaks down, specifically a major electronic device, an appliance, or your vehicle, it can be a financial emergency that eats away at your savings in a hurry. With major expenses like these that happen out of the blue, extended warranties may offer some peace of mind that the entire cost does not fall on your shoulders.

However, extended warranties often get a bad reputation for their high cost, minimal value, and claim restrictions. Before buying an extended warranty on your next major purchase, consider the facts about how extended warranties work and know what questions to ask before paying the added cost.

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Extended Warranties Explained

To understand if extended warranties are worth it, you first have to recognize what it means to have one. An extended warranty is actually not a warranty at all, according to automotive website Edmunds. Instead, an extended warranty is an insurance policy of sorts for your car, appliance, or electronic device that helps protect against the financial loss that takes place after something goes wrong. This agreement covers repairs to the product for a set period of time, for a fee.

There are extended car warranty options sold by car dealerships and other extended warranty options for other products offered by the manufacturers as an add-on to the actual item itself. Customers are asked if they want to buy an extended warranty before the sale is complete, typically marketed as additional peace of mind for a specific purchase. The cost of an extended warranty can be high, particularly with high-dollar purchases.

Often, customers who are financing the deal with a loan are given the option to include the total cost of an extended warranty in their total balance, increasing both the monthly payment owed and the total cost of the loan. While this can seem like a smart way to save yourself from unexpected, significant costs in the future for repairs, extended warranties may not be worth it for some purchases.

Questions to Ask When Buying an Extended Warranty

The Federal Trade Commission offers some guidance on extended warrantiesand if they are indeed worth it for a major purchase. The answer on whether extended warranties are worth it boils down to the following questions.

How Likely Are Repairs?

For smaller purchases, like some electronic devices or appliances, repairs may not be imminent. However, for bigger ticket items, like a vehicle, a major repair could cost a significant amount that would be difficult to cover out-of-pocket. In the latter cases, an extended warranty might be worthwhile.

Is It Extra Coverage, or the Same as the Standard Warranty?

Many salespeople offering extended warranties on products fail to mention that some of the repairs covered by the contract are already taken care of by a product’s standard manufacturer’s warranty. If this is the case, there is no need to purchase an extended warranty.

Who is Responsible for Repairs?

One of the biggest points of confusion with extended warranties is who is responsible for offering repairs or reimbursement for covered repairs under the contract. The FTC strongly recommends consumers look for details about the warranty company on the contract before signing. This information includes an address, phone number, or website on the contract, as well as online research for customer reviews or complaints against the warranty provider.

How Are Claims Managed?

Extended warranties may have restrictions on how claims for repairs are handled which can severely dilute the value of the warranty itself. Be sure to check the process of claims before accepting and paying for a warranty contract, and evaluate if the claims process is feasible for you.

Why an Extended Warranty Is Worth It

Extended warranties can be beneficial for big-ticket items that have a high likelihood of needing repairs in the future. This is because extended warranties transfer the risk of a major expense to the warranty company, either in part or in whole, and off the buyer’s shoulders.

Additionally, the cost of an extended warranty may be covered quickly if a significant repair is needed shortly after you purchased the item. Giving consumers the ability to roll the price into a loan or other financing also makes the add-on more affordable up front.

Why an Extended Warranty Isn’t Worth It

While there are some advantages to extended warranties, many consumers feel as though they are not beneficial in the long run. Extended warranties, just like standard warranties, have expiration dates, and if repairs are not needed while the warranty is in place, customers lose money. Also, the price of extended warranties for big-ticket items can be excessive, even if they are added to a financing offer. The added cost may be far higher than the cost of repairs, meaning consumers paid for no benefit.

Finally, extended warranties often have restrictions on how claims can be made, what repairs are covered, and who can complete the repair work. There are instances where consumers cannot get the required repairs done within these parameters, and this essentially voids any benefit of the warranty.

Are Extended Warranties Worth the Cost?

Understanding if extended warranties are worth it can be a challenge, especially when the pressure to buy is high. However, financial experts including Clark Howard and Dave Ramsey suggest steering clear of extended warranties altogether.

One reason extended warranties are not recommended is the reality that 55 percent of people who purchased one never actually used it. Of the remaining consumers who had one and used it, the warranty cost outweighed the benefit.

Before caving to the pressure of salespeople at the end of a major transaction, be sure to evaluate your need for an extended warranty, what the warranty covers, and the total cost of the add-on before paying an additional expense.