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Does it make sense to buy extended product warranties?


Extended Warranty Cons
Should President Gerald Ford have sprung for the extended warranty for his toaster? Probably not; he could likely afford to simply replace it.
Should President Gerald Ford have sprung for the extended warranty for his toaster? Probably not; he could likely afford to simply replace it.
Dirck Halstead/Time Life Pictures/Getty Images

­So you're already aware of two reasons why extended warranties are generally a bad idea -- they're profitable, which means they usually go unused, and they actually expire a year sooner than advertised. There are plenty of other perfectly good reasons to opt out of an extended warranty as well.

You may not be aware of it, but many credit card companies automatically give you an extended warranty on an item you purchase using their cards. All American Express cards offer warranties, and higher-end cards from Visa and MasterCard do the same. Usually you'll have to submit your receipt and the expired manufacturer's warranty to qualify for a repair or replacement, but why purchase an extended warranty from the manufacturer or retailer when your credit card company already has you covered?

There's also the consideration of cost. Can you believe that some extended warranties are actually more expensive than the item they cover? If the warranty is less expensive than the product it's attached to, you should probably consider simply replacing the item. Warranties often require you to mail the defective product to the manufacturer -- and you may have to pay for shipping both ways -- which means you'll wait awhile before you see your repaired or replaced possession. If the price is low enough that you can swallow purchasing a replacement, you'll have it immediately. (Of course, you'll want to recycle the older item instead of simply tossing it, and you may want to consider finding another brand).

The quality of many goods leads us to another reason to skip an extended warranty: Many products are made so well that they usually don't break for a while. While a PC has a 37 percent chance of breaking within three years, other products, like rider lawn mowers and refrigerators, are less likely to conk out in the same period. If you've done your homework on a product you're interested in, you may find that it's a durable one. If the product probably won't break within the time frame covered by the extended warranty, purchasing one is a bad bet.

Ultimately, the numbers spell out why extended warranties are usually a losing proposition. On average, for every $100 spent on an extended warranty -- which, in 2004 totaled $15 billion in the United States -- only $20 ends up being spent on repairs or replacements for defective items. The other $80 ends up in the warranty issuer's pocket [source: Armstrong]. Ultimately, it's in the best interest of the manufacturer to produce a durable product that won't require repair or replacement -- and hope you'll purchase an extended warranty in case it does.