Reason for my question-I just bought a new computer. The salesman (probably most of his commision) kept pestering me to buy a 3-year warranty. I thought about it, and concluded:
(a) the computer probably will not break in 3 years
(b) it will be obsolete in 2 years.
I’ve never bought an extended warranty on cars-and always have come out ahead. I always reasoned that you should bank the extra money, and your funds would probably be enough to cover likely repairs.
What do you think?
Consumers Reports is vewhemently against extended warranties, claiming that there is an enormous markup on them and they are not worth it.
Well, while I won’t condemn extended warranties on all products, I definitely will weigh in against them with respect to computers. The only way you end up money ahead is in the unlikely event that your PC suffers major failure immediately after the normal store warranty runs out and if you are unable to do the repairs yourself or have them done by a computer geek friend, thereby saving the usually exorbitant labor costs. Replacement parts are pretty inexpensive, and will no doubt be cheaper yet by the time your PC breaks down. Don’t buy the warranty unless you are into giving your cash away. (In that case, I’ll sell you an extended warranty on your PC for half the price they’re asking :))
You should only buy an extended warranty if you believe the product will break down during that time period. Of course, if you really think the product is so shoddy that it will break down during that time period, then you shouldn’t buy the product in the first place.
Also keep in mind that many extended-warranty providers will make you jump through endless hoops to get paid on a claim. Is it worth hours on “hold,” arguing with people, and demanding to speak to supervisors to make a $100 claim on a warranty that cost $50? I don’t think so.
What will you do if you buy the extended warranty, your computer needs a new video card, and the warranty company won’t make good? Sue them over $100? (Look at the extended warranty document’s fine print. Very likely, it contains an “arbitration clause.” Arbitration often requires a $500 filing fee. It also makes class actions much more difficult to bring. Ask yourself, why would this company want to make it hard for me to sue them?)
Yes, I had a bad experience with a warranty. But look at it this way, you’re putting money up up front. The company performs later, if at all, and has every incentive to make it VERY hard for you to get what you’re entitled to.
When I bought HAL here (IBM-brand business PC) for my home business in March 1998, I shelled out $94 for a 3-year on-site next-day IBM parts and labor warranty. Original hardware goes down, they fix it. I’d had support nightmares with my previous PC and wanted to avoid the headaches. For $94 I figured it was worth a shot.
I’ve invoked the warranty twice, and got a new parallel port and new CD-ROM installed in my home office. I called and told them the part was broken, and they came out and replaced it. For the CD-ROM, the phone tech didn’t even run through any diagnostics – I described the symptoms, and they immediately scheduled a service call, and the tech came out and replaced the drive without even checking the old one. I signed the form and shook his hand. The lack of aggravation, not having to pack it up and haul it 50 miles to a service center (and then pick it up), not having to lose my computer for a week, not having to abandon paid work to futz with my computer – as they say in the MasterCard ads, priceless. I love it.
Of course, this is from a business perspective. If your computer is for recreational use only, repairs probably won’t be as critical an issue as they are for me.
I used to work in an electronics store. As an employee, I was constantly badgered by management to sell the “CSP” extended warranty. I was given long classes on how to “plant seeds”, “build value”, and “overcome objections”.
I was such a tool!
After extended thinking on the suject of extended warranties, some are worthwhile, and others are a waste of money. Generally speaking, there are two types of “extended coverage” warranty; enhanced benefit warranties, and extended length warranties.
Extended length warranties are just that, a simple extension of the manufacturers warranty. Generally speaking, such a warranty will cover parts and labor for a set period of time on failures due to defects in manufacturing. This means that they will not cover failure due to wear and tear, abuse, misuse, acts of god, power failure, or accident. Unless such an extended warranty was really cheap, I wouldn’t waste my time or money on it. I would consider such a warranty to be cheap if it is less that 1% of the price of the item. The only warranties that fit this description that I am aware of are those sold by Home Depot on appliances, which cost $69.00 IIRC. Admittedly, this would only be in the price range I have described if you were buying one of those high end commercial appliances.
Enhanced benefit warranties on the other hand, are warranties that offer benefits above and beyond what the original manufacturer’s warranty offers. Such benefits include in home maintenance, unconditional over the counter exchange, cleanings, power surge protection, food spoilage guarantees, replacement guarantees, and my personal favorite, annual maintenance.
In home maintenance of course means that if there is a problem, a technician will come to your home to repair your product. Sonds great, but many times they will only do so at set times, or with a trip fee charged. Also, this is only available on very large items (such as appliances). Many times, the retailer will use a service provider that is overbooked and undercompetent, meaning that you get bad service from the individuals that perform the maintenance.
Over the counter Unconditional Exchange, meanwhile, means that no matter what the problem you may have is, you may return it to the store at any time, and they will hand you a new one, or equivalent model. This is arguably the best benfit offered on extended warranties. Unfortunately, it is usually only available on very small items, such as answering machines.
Cleanings and Annual maintenance are generally offered on items such as VCRs (which are thought to have a tendency to fail when they get dirty) and major appliances. It, of course, means that you may one a year (or sometimes, whenever you want) bring your unit in for maintenance even if it isn’t malfunctioning in any way. The theoretical benefit is that you can always keep the item in top operation condition. However, such things usually mean that you have to bring the item to a service center, and do without it for a period of time. As such, this is an inconvenient benefit, at best IMHO.
Food Spoilage guarantees offer to reimburse you for food that spoils in the event that your refigerator fails, due to a defect in maufacturing or workmanship. The benefit is usually limited to a small amount of money ($100 typically) over the entire length of the warranty. This benefit is usually very hard to redeem. Usually, you must first experience a failure, get it repaired, buy new food, then submit the receipt for the food to the retailer who will then reimburse you. This process is intentionally excruciatingly slow.
Finally, replacement guarantees assure that in the event of a failure, if the repair would cost more than a replacement would, they will replace the item with a new one, or equivalent if the specific model is no longer available. Note:** this means that they will give you a unit with similar features, not similar value.** For example, if you purchased a computer for $1500, and then echanged it under warranty 3 years later, you’d be given the $400 model which was most equivalent to the model you purchased.
To summarize:
Extended warranties are generally bad. However, if you are using the item in a situation that may result in higher risk that would be considered normal, they may be a reasonable value. For instance, if you were to purchase a washing machine, and you anticipated using it 20 times per week, your washing machine is at higher risk that the average families. In this instance, and in most other instances where you’ll be using the item more than would be typical, extended warranties may be useful.
Sorry for the longwindedness, I hope this helps.
The value of an extended warranty depends on the opportunity cost. To calculate this, you have to know what percentage of the items sold under the extended warranty actually end up needing replacement or major repair within the warranty period, which is a figure the store may not know or may not be inclined to give you.
Say a VCR costs $200. Say that 20% of these VCRs end up needing a major overhaul or replacement in the first 2 years of ownership. Thus, if you don’t buy the warranty, there’s a 20% chance you’ll need to spend an extra $200 to buy a replacement VCR. The opportunity cost of not buying a 2-year extended warranty is 20% x $200 = $40. If a 2-year warranty costs more than $40, then, it is not worth it.
I recently bought a refrigerator, washer, dryer, microwave and computer. (new place)
I bought extended warranties on everything except the computer and microwave. For the 150 bucks, it was worth it not to worry about the $1500 or so dollars I spent on the big 3. But my fiance is also fanatical about keeping all the paperwork of EVERYTHING we ever buy, so I know we will be able to take advantage of the warranties for the next 5 years.
If it had just been me, I never would have gotten the warranties for the sole reason that I would have lost the paperwork and forgotten it was insured.
In summary…If any of the stuff breaks anywhere in the next 2-5 years, I figure I broke even. If anything worse happens, I’m protected.
I disagree with the statement made that “if you think it is pretty likely the product might break down during the warantee period then get the extended warranty.” I would argue almost the other way around with warranties/insurance.
Insurance things like this work best for unlikely events. I.e., it makes sense to buy insurance against a house fire exactly because it is very unlikely…So, what you are basically doing is spreading the risk around amongst many people, so you ain’t down $150,000 in the unlikely event your house burns down. However, if you start buying insurance for events that are fairly likely to happen (and won’t be such a disaster if they do), then in the long run it will average out in your own life…I.e., you will be out the money for the insurance and they will pay for the things that do break down. And, hint, unless you have a reverse-midas touch, it ain’t gonna work out that you pay less than what you get in return, because these companies are in business to make money.
And, in fact, unlike other types of insurance, I believe that the extended warranties operate on a huge margin. I was recently offered an extended warranty on my microwave oven that over 3 years would have cost more than what I paid for the freakin thing! I couldn’t believe they had the gall to price it that way!!!
Having said that, if the peace of mind of knowing you can get the product repaired is worth the extra price to you, you might want to get the extended warranty to save hassle.
P.S.—A corollary of the above logic is that it is not necessarily stupid to play the lottery even if you know it takes in more money than they give out…I.e., there is nothing magical about the break-even point in such a long-shot situation because, unless you can afford to buy tons of tickets, things aren’t going to average out for you… You are either going to never win or you will hit the big time! (I’m talking about big jackpots here…People who play it for the little dinky wins probably are being stupid because those will tend to average out to the odds…which are not in your favor.)
Extended warranties are generally a HUGE ripoff. You can tell that the profit margins are high by the amount of effort the salesman goes to to try and sell you one.
Often a salesman will make more commission on the extended warranty than from the sale of the original item. Sometimes MUCH more.
One thing to remember about extended warranties is that you get NO benefit from them until the manufacturer’s warranty expires, yet you have to pay for them NOW. That means that in essence you are lending money interest-free to the company that sold you the warranty, since their liability doesn’t kick in for a few years.
Put another way, if you took that money from the extended warranty and put it in a secure investment, then by the time the manufacturer’s warranty runs out that money will be worth a lot more. It’s especially bad on extended warranties on cars, which sometimes don’t even kick in for 4 or 5 years. By that time, the money you spend would have appreciated by perhaps 60-80%.
Here’s my suggestion: Create a repair fund. Every time you are offered an extended warranty, refuse it but take the same amount of money and invest it in your repair fund. When something breaks, take the money out of the repair fund.
My guess is that if you continue doing that for the next 40 years, you’ll have a LOT of money in that account. And within at most a couple of years you’ll have enough money in there to cover any reasonable repair that might crop up, giving you the security of the extended warranty.
Remember to think of your repair costs as a statistical average of all the stuff you buy. If you refuse the extended warranties on your car, your fridge, stove, stereo, Video Camera, etc., that alone will probably give you enough money to pay for the repairs on any one of those items. The odds are that most of these things will work fine though the extended warranty period if they survive the original warranty. Extremely high. I haven’t paid for a repair on a single object in my home for perhaps 5 years.
I had to laugh when I bought a 15 dollar mouse at CompuSA and they asked me if I wanted to spend 3 dollars on an extended ‘service agreement’–I mean, REALLYY----------
I too subscribe to the idea of insuring against disasters, not to the little things.
Clark puts Extended Warranties into his Rip-offs Section, so that should tell you something. I don’t want to quote him at length (thereby violating his copyright (See, Jerry and Tuba? SEE?!?!)), but the gist of it says:
**
I thought that last part was a particulalry good point.
I saw ‘hidden camera’ expose’ on Best Buys extended warranties. The employees (according to the show) were hard pressured to sell them, even to exaggerate, if not flat out lie about, their value. They had employees, on tape, telling customers that certain things would be covered that would not be covered.
Then they trotted out a bunch of people who had tried to actually use the warranty to get something fixed. It was sad. 'Course, this was just at ‘Best Buy’.
I am 34 years old, and have NEVER bought an extended warranty on anything. And I have never had a product break down between the time the regular warranty expired and the time the extended warranty would have expired.
Usually, shit break down right away (covered by the standard warranty), or years down the line (beyond the extended warranty.
I’ll take the risk. Like someone mentioned before, once in a great while something may break down in this small time frame… but you’ll be better off just paying for a new washer one year and a new microwave 30 years later than paying for this extended warrenty crap.
If something I own breaks down after one year but before 3 years, I’ll be sure to let you all know 
Bye now.
As someone who knows how these things are actually priced, I have to tell you that the law of “Charge what you can get” comes in here.
I may get lynched by an association of insurers here but the classic example of this in practice is actually credit card insurance.
If you work through the myraid annoying calculations to work out the theoretical fair premium for insuring a credit card it comes to about £5 per year (about $7 to $8).
However you’ll find that it actually costs you about ten times this.
Why? Well simply because market researchers went out there and found out what the market would bear. They were delighted when they found out that they could get away with this price. Competition doesn’t come into it because you have a captive market.
The same idea works with warranties. I can assure you that for 99% of warranties the price charged is waaaaaay in excess of the fair premium.
caveat: there are a few shops that sell cheap warranties as a customer-relations tool. Clearly these are worth it, but aren’t really what we’re talking about here. You’ll know them when you see them - they’ll stand out like a sore thumb.
To address some specific points:
tracer - absolutely, but you failed to include the time value of money with this:
The opportunity cost is greater than you say since you would otherwise be earning interest on the money you hand over for the warranty, a point that is particularly applicable for 5 year (10 year?) warranties. This is the point that Sam Stone was making. In fact I rather like Sam’s “disaster fund” method. Personally I always write off about £1000 at the start of each year for stuff going wrong, which amounts to book-reserving rather than advanced funding. On the plus side this gives me less opportunity cost but on the minus side it’s a less secure way of accounting for nasty things. I guess that it all comes out in the wash.
Oh, and I couldn’t agree with jshore more.
regards,
pan
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Moving to IMHO.
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