SCAM ALERT: Extended Warranties Are Just Plain Stupid

scamStupid is a tough word, but this is a tough-love blog.  When you ponder purchasing an extended warranty or “protection plan” for some electronic gadget or appliance, just think “stupid”.   Don’t buy it!  It’s a sucker’s bett.  Extended warranties are insidious; The Journal of Consumer Research found that people are more likely to buy a warranty on something they enjoy than on something they don’t. So a business owner may not buy a warranty on business equipment, but he or she will do so on a big-screen TV!    Warranties and extended service contracts have become a core product for retailers, generating about US$15 billion in revenue annually and gifting retailers a 200% profit margin…..and that’s not a typo. According to Business Week, in 2003 warranties accounted for more than half of Best Buy’s profit and almost 100 percent of Circuit City’s.  And yet most consumer advocates argue against buying these contracts, which can cost as much as 50 percent of the price of the product.

Recent research reveals that retailers tend to offer a lower price on a home appliance – in an effort to beat competitors – but regain some of that margin by getting a premium price for the extended warranty. So that means if you always buy the extended warranty, you are subsidizing the discount being offered to your fellow consumers who decline the extended warranty. And here’s the worst part; low-income consumers are more likely to purchase warranties because they are more sensitive to a product’s replacement costs.  Like payday loans,  these warranties exploit those consumers who can least afford them!  Argh!   And every consumer advocate worth mentioning warns consumers not to buy these things:

Consumer Reports says you shouldn’t buy extended warranties.

Clark Howard says don’t buy them.

Bob Rankin calls them a ‘scam’ (BTW, we agree).

Consumer Affairs warns that retailers are just preying on your fears or, as they call it, your piece of mind.

The pitches made by the electronics/appliance salespeople are nothing short of desperate babbling:  “Your product could break.” “You are clumsy. ” “Your kids are clumsier.” ” The plan is convenient and will save you time. ” “You’ve already saved $200 from what the product cost two months ago. ” “It’s cheaper than a dinner out.”  All of these are BAD reasons to buy an extended warranty. And just to drive home the point in the most excruciating, painful way possible, consumers could get the same protection for FREE buy just making the purchase with a credit card; most credit cards automatically double the manufacturers’ own warranty. This way, you give yourself additional piece of mind without having to spend anything extra.   But just in case you need additional reasons for not buying extended warranties:

  • Repairs should be covered by the manufacturer.  Although manufacturers’ written, or “express,” warranties often don’t last as long as they used to, there’s a good chance your product is covered for at least 90 days. Buying a service plan may not only duplicate coverage you already have, it sends manufacturers a message that limiting their express warranties will increase the sale of service plans. You shouldn’t have to pay extra to get manufacturers or retailers to stand behind their products.
  • Products rarely break within the service plan window. Electronics products usually don’t break during the two-to-three-year period after the manufacturer’s warranty expires and the service plan is in effect.  And just about every device you buy comes with at least a one-year warranty from the manufacturer. So if you are paying insurance through an installment plan (like with a smartphone)  the first 12 payments you make to a smartphone insurer give you absolutely nothing.
  • Repairs don’t cost much. When electronics and appliances do break, the repairs, on average, cost not much more on average than a service plan. Consumer Report’s latest survey shows that you pay only $16 more if you repair it yourself rather than buy the service warranty.
  • Replacements are usually inferior.   Most extended warranties provide that you must accept a refurbished replacement device if a replacement is granted. For example, if after just 12 months, your iPhone was stolen, your (refurbished) replacement from Verizon would cost $320 in warranty plus deductible costs. But these phones can be found all over eBay for under well under $300. And you’ll continue to pay monthly for that warranty, at least until your two-year contract expires.
  • Manufacturers sometimes cover out-of-warranty items. If a product breaks down in an unreasonably short time or if there’s a known problem affecting many customers, manufacturers often will help by replacing the item free or at low cost or by providing free or discount parts or repairs. So contact the manufacturer and ask for help. If necessary, appeal all the way to the executive office.
  • Most products automatically come with an unwritten “implied warranty of merchantability,” which means the items must function as a person reasonably would expect, be free of substantial defects, and last a reasonable amount of time (although the duration of the implied warranty usually is no more than four years). If a product can’t meet these requirements, you may have a right to pursue the retailer and/or manufacturer legally.
  • Insurance may cover you. Plans that cover you if an item is stolen, destroyed in a fire or other major event, or vandalized may only duplicate coverage you have under your homeowner’s or rental insurance policy.   Talk to your insurance agent about adding a rider to homeowner’s or renter’s insurance that covers all such devices. Bob Rankin reports that a consumer was able to get an insurance rider for a mere $27 per year with a $50 deductible per claim!
  • The plan may let you down. Service plans typically have many fine-print exceptions that a provider can use to deny your claim.

The Bottom Line:  just don’t buy extended warranties.  They are stupid!   If you are seriously concerned about being able to replace the item, then save the money you’d otherwise spend on service plans. Place it in a savings account, where you’ve socked away six months to a year of living expenses, or put it in a designated product repair/replacement fund. If and when, when a product breaks, you’ll have the money to repair or replace it.  But before you dip into that fund, contact the manufacturer or retailer if you think the problem was the result of a defect, or use coverage you may have from your credit card.   And, when you buy a product, check out its reliability beforehand using the consumer resources on the Internet.

DIY Repairs on Your Electronics

It is common to find warnings by manufacturers on your electronics gadgets like computers, laptops and smartphones that if you attempt to do your own repairs, the warranty is voided.   This claim is illegal!    You have a Federal law that gives you the  right to open up and fix what you own. And that includes more than just computers — your right to repair extends to game consoles, cameras, household appliances, automobiles, medical devices, lab equipment, farm tractors and more.

The claim that warranty terms which prohibit independent repairs are illegal rests upon a section of the 1975 Magnuson-Moss Warranty Act that forbids “tying” consumers to specific repair services or specific types of parts. The MMWA is what allows you to take your car to an independent repair shop instead of the ludicrously expensive dealership that sold you the car. Likewise, you have the right to take your PC to a local repair shop, or to fix it yourself.  Microsoft, Samsung, Apple a know darned well that Magnuson-Moss exists as do anti-trust laws against ‘tying agreements.  If you find yourself in a situation where a manufacturer refuses to honor their one-year (usually) warranty because you attempted your own fix,  we recommend that you contact  The Repair Association.  

2 thoughts on “SCAM ALERT: Extended Warranties Are Just Plain Stupid”

  1. RE: Your advice never to buy extended warranties.


    Does this also apply to extended warranties on AUTOMOBILES ?

    • Good question. Our answer is that extended auto warranties for new cars are generally not a good idea. Consumer Reports calls them an expensive gamble. You’d save a lot of money by doing a bit of research on the reliability of the car you are purchasing rather than paying for an extended warranty. Used cars present a slightly different challenge; they may be a good idea. If the used car you are buying doesn’t have a good track record, you may want to consider it, but we agree with Car and Driver, that you need to be very selective.


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