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Extended Warranties – Are They a Smart Investment?

Robert Menard,  Certified Purchasing Professional, Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Robert Menard
Certified Purchasing Professional,
Certified Professional Purchasing Consultant, Certified Green Purchasing Professional, Certified Professional Purchasing Manager

Extended warranties are usually associated with automobile purchases but they also extend to home appliances and major equipment buys, both at the Business to Consumer (B2C)  and Business to Business (B2B)  spheres of commerce. The word “extended” refers to a term or time period beyond the basic warranty. The extended warranty is basically an insurance policy intended to protect against losses, or at least defray the cost. Especially when the dollar amounts are “large”, there is an economic inducement to insure against loss with the purchase of an extended warranty.

Are Extended Warranties Worth the Cost?

This question crosses the mind of almost every buyer. Let us consult the wisdom of a recognized authority in the field, Dave Ramsey . Of all the vaunted “financial advisors”, Dave is in the top tier.

In a recent column, Ramsey said that he does not buy warranties of any kind. He claims that “between 12 and 18 percent of the cost of the warranty apply to the probability of repair.”  Dave goes on to say that “The rest is eaten up in profit, overhead, and marketing costs.” Put into slightly different words, Dave suggests self-insurance, and he states that, “…if something goes wrong, you couldn’t afford to buy that item in the first place.” 

I agree and offer another reason. Assume a large ticket buy like an automobile or appliance. By design, I buy items known for high quality, reliability, longevity, and similar qualities. Does this cost more? Heck no, the price tag is higher but the Total Cost of Ownership  is lower. For example, the Toyota brand has been a family favorite for more than two decades. We routinely buy a Toyota every 5-7 years and never pay for an extended warranty of any kind because the car is built so well that the chance of high cost quality defects are low; low enough that we are willing to self-insure for the possibility. During the 25 past years, we have bought eight vehicles (including a Subaru and a Jeep). The cost of the top of the line extended warranty ranged between $2-$3 thousand for each vehicle. Not purchasing the warranty saved us almost $20,000 over this time, an amount that would buy an upscale used vehicle in today’s market.

You might say that our example is isolated and anecdotal. Perhaps, so let’s take a larger sample. Consumer Reports, in an April 2014 story entitled, Extended car warranties: An expensive gamble The majority of buyers never use the coverage”  that “55 percent of owners who purchased an extended warranty hadn’t used it for repairs during the lifetime of the policy, even though the median price paid for the coverage was just over $1,200. And, on average, those who did use it spent hundreds more for the coverage than they saved in repair costs.” It is an illuminating story and I commend it to the readers of this blog.

Is the warranty ever worth the expense?

Yes, I believe it is advisable in rare circumstances. We bought insurance on our daughter’s smart phone because she loses and breaks them so often. A few years back when we renovated our kitchen, we bought a new “counter depth” refrigerator. Even though LG was the manufacturer, we thought it wise to buy the insurance since the product was so new and untested. We have indeed used the warranty but so far, the covered repairs have cost more than the damage.

Moral of the story: save your money and do not buy the warranty.

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