Extend The Warranty Or Cut Your Losses?

Here's how to tell if the precaution is necessary

We all know the routine. In the final seconds of making purchases—both big and small—the salesperson with a Cheshire cat-like grin asks us the question no one wants to hear: “Do you want to buy the extended warranty?” Much to your chagrin, you fall through the trapdoor of never-used warranties that have milked you for thousands of your hard-earned dollars. OK, so this example is a bit extreme. But it sounds familiar doesn’t it? It should. Online reports suggest that extended warranties net $15 billion a year in premiums on everything from cars to refrigerators to iPods, which has one of the best deals around for a $60 service contract, but how can you decide if it’s really worth the asking price? Use this checklist as your guide.

As with all purchases, it’s imperative to research before you buy. Our experts say whether you buy the extended contract depends on the product, but you don’t have to necessarily buy at the time of purchase. Decide what’s best for you then go back if you really want to make the purchase.

illustration by raul ferran : november 2005

Understand what you’re buying. They were once known as extended warranties—a little slip of paper that said you had a bit more coverage on a product once the customary warranty expired. Nowadays, they’re called extended service contracts, but “it’s really like any other type of insurance policy,” says Chris Hall, president of RepairClinic.com, a Website that helps do-it-yourselfers fix their own appliances. “These companies have to be profitable, so they sell you policies at a price where claims don’t exceed the premiums.” In fact, retail industry analysts say that last year, all of Circuit City’s operating income came from extended warranties.

Do the numbers. If you’ve purchased a complex or high-end product, like a custom-made stove worth $10,000, then it will be costly to fix. So consider the service contract. “A warranty may also make sense if you’re elderly with a fixed income,” says Hall. “If you were hit with a big bill two years down the road, could you afford it?” If the answer is no; then consider the contract. But if you buy a $50 DVD player and the service contract is $100, there’s little upside to buying the extended service. To put it another way: “If you compare the percentage of the cost of coverage, homeowner’s insurance is $600 per $300,000 worth of coverage, equaling .2% versus $50 for a $400 product, which is 12% of the purchase price,” he says.

Review the contract before you buy. If you know which product you intend to buy, try to get a peek at the service contract. Go online to the manufacturer’s Website to get a copy or call and request it. “If you’re looking at a particular vehicle, but it gets a poor rating from J.D. Power and Associates for its electrical or mechanical components, or if you plan on keeping the vehicle beyond the basic vehicle warranty, you may want consider an extended service contract,”

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