Do extended service contracts warrant your attention and your dollars?
It’s a question that comes up time and again. Seemingly whenever we buy anything of value, a salesperson suggests that we should buy an extended warranty, sometimes called a service contract.
There are three common types: extended warranties for consumer products, such as a newly bought camera or computer; an extended warranty on a vehicle; and a home warranty, which addresses the major appliances in a house, such as a furnace or dishwasher. In each case, the warranties are essentially repair bill insurance.
There’s a good reason warranties are offered so often — they can be very lucrative for sellers. But are they a good deal for consumers? The short answer, said many consumer-interest groups, is “no,” or at best, “not often.”
Consumer Reports, for example, recently said of extended warranties: “Chances are that what you spend will be money down the drain.” It found the median price for in-store electronics warranties was $75, while a major appliance warranty cost $118.
But it’s difficult to write off such service contracts altogether because of the peace of mind some people might get from a longer or more robust warranty. That’s difficult to place a dollar value on.
Many finance experts espouse a simple rule of thumb: Don’t buy insurance — or extended warranties — to protect yourself from small-dollar losses. Insurance is for financial disasters. Dropping your cellphone in the toilet is annoying and inconvenient, but probably not a financial disaster.
The cure-all for buying extended warranties is maintaining a cash emergency fund. If you have a stash of cash, you can say no to all those warranties and just pay for repairs to your products, vehicles and home appliances.
But the counterargument is that few people maintain a repair fund, said Tim Meenan, executive director of the Service Contract Industry Council, an industry group representing warranty companies. “I’ve probably asked more people than anyone else … ‘Do you have a fund set aside to make repairs?'” he said. “I’m waiting for the first ‘yes.'”
Here’s a look at three common types of extended warranties: