Why Extended Warranties Might Not Be Worth Your Money

When you make a significant purchase like a refrigerator, laptop, smartphone, or car, you’re often presented with the option to buy an extended warranty. While it may seem like the best way to protect against the potentially high cost of repairs once the standard warranty expires, the likelihood of you needing to use the warranty is low.

In fact, if the product is well-built and reliable, extended warranties are more of an unnecessary expense than a worthwhile investment.

Key Takeaways

• Extended warranties offer protection beyond the standard warranty.
• The likelihood of needing an extended warranty is low, especially if the product is durable and reliable.
• The cost of an extended warranty may be more than the cost of repair or replacement of the product.

How Extended Warranties Work

Extended warranties are service contracts that surpass the manufacturer’s standard warranty, covering repair costs, replacement, and sometimes even accidental damage for a specific period.

These warranties give the buyer peace of mind by ensuring they won’t be stuck paying a hefty repair bill if the standard warranty has expired. However, extended warranties vary in terms of coverage and pricing.

In a sense, extended warranties are a type of insurance, which is why many people consider them a smart investment when purchasing big-ticket items like cars.

“An extended warranty is for the ‘what-if,’ just like car insurance. You don’t buy insurance expecting to get T-boned; you buy it in case something happens. Same thing here,” said Tomislav Mikula, automotive consultant and founder of Delivrd.

What to Consider When Purchasing an Extended Warranty

Before purchasing an extended warranty, carefully evaluate whether this added protection aligns with your needs and the value it provides for the item you’re buying.

Specifically, you’ll want to factor in the cost, coverage, coverage period, claims process, type of product, and source.

Cost: Compare the warranty price to potential repair or replacement costs to ensure it is a worthwhile investment. Some warranties come with deductibles, which add an additional cost beyond the purchase price.

Coverage: Confirm what is covered by the warranty, as well as exclusions and limitations. Certain types of damage may not be covered, leaving you to cover the cost of repair or replacement, which defeats the purpose of the warranty.

Coverage Period: How long does the extended warranty last beyond the standard warranty?

Claims Process: Be sure you understand how the claims process works. How long does it take to process a claim? Where will your product be repaired?

Type of Product: Evaluate the type of product you are purchasing to determine its reliability. For example, items like appliances or cars are built to last and may not need extra coverage if they’re from a reliable brand. However, smartphones, which last an average of three years, might benefit from an extended warranty.

Source of Warranty: Whether it’s from the manufacturer or a third party can impact coverage, reliability, and claims process, so it’s important to understand the difference between the two.

“Not all warranties are created equal. Every warranty has different coverage, and even if two seem similar, manufacturer-backed extended warranties are almost always better than third-party ones. My rule of thumb is if the manufacturer offers extended coverage, go with that,” Mikula said.

Why Extended Warranties Might Not Be Worth It

Despite the global extended warranty market being projected to reach $286.4 billion by 2032, many consumers are paying for coverage they may never need.

Ideally, if you buy reliable and durable products, the likelihood of them needing repairs after the manufacturer’s warranty expires is low. In many cases, the cost of repair exceeds the cost of the warranty, and if you don’t end up using the warranty, it’s money wasted.

“Buying a warranty comes down to one simple question: Do you value peace of mind? Nobody should buy a warranty hoping they’ll need it. If you’re worried your car is going to break down, take a step back and ask yourself: Why are you even buying this car?” Mikula recommended.

Consumers can also rely on other options like emergency funds or credit card protection to cover unexpected repairs, making extended warranties unnecessary.

The Bottom Line

Extended warranties can offer peace of mind, functioning as a safety net for certain purchases. However, many products are reliable, so the cost of an extended warranty might outweigh the benefits. This doesn’t mean they are always unnecessary, but it’s important to evaluate each purchase individually to determine if it’s worth the extra cost.