Financial guru Dave Ramsey states unequivocally that extended warranties are rip-offs. As a Ramsey follower, I agree. I regularly smile and say “no thank you” when Best Buy or Wal-Mart asks, “would you like a warranty with that product?”
Reasons to self insure
Because these warranties are high profit items (many studies indicate over 50%), the buyer can reap that profit himself by declining the offers and self insuring via his emergency fund. This is exactly what I have done over the years, realizing that even if I will occasionally need to divvy out repair or replacement payments, I am nevertheless better off in the long haul by being self insured.
I even said “No” (after saying “Yes”) to my cell phone protection plan. My point? I don’t buy extended warranties, unless…
What if I can’t afford the repair?
As we were negotiating for our 2000 Ford Windstar van last spring, the angst of the head gasket failure on my beloved 1999 Cadillac DeVille was still fresh in my mind. The fix was a pricey one: it needed an engine and I was debating whether to fix it, sell it or junk it. “What if”, I pondered, “after we buy this van, we learn that it needs an engine or a transmission? Could we afford it?” Because the dealer had mentioned that an extended warranty was available for the Windstar, I asked him for more information. His response: “I can get you a 24 month, 24,000 mile bumper to bumper warranty for $800.”
It turned out that we were able to buy the Windstar, including the warranty, for the dealer’s original asking price. We realized that he had given himself enough cushion to accommodate our request, but the point is this: we bought the extended warranty and we were glad we did.
Check with your Mechanic First
Fortunately, our warranty has proven to be all it claims to be, but if we had it to do over again, we would have checked with our mechanic to learn if he will perform the warranty work and if the company backing the warranty is reliable.
I am happy to report that our mechanic does indeed work with our warranty company, ASC Warranty who, halfway into the warranty period, has paid $668 to replace two power door latches and the intake gasket. We still have 12,000 miles to go on this coverage, and although we hope our van will need nothing, we feel good knowing that our risk is taken care of. We will not be eligible to renew the bumper to bumper when it expires, but we will qualify for an additional 12,000 mile drive train warranty. I am leaning toward buying it.
Is an extended warranty worth it?
If you can self insure, no. However, if you do not have the needed repair funds set aside, especially if those repairs can be quite pricey, yes.
Readers: Do you purchase extended warranties? For which items? How has your experience been?
We have an appliance service plan because appliances seem to break regularly. We have a cell phone service plan simply because we use them so much that there’s always a good chance that something will break. I will generally buy a plan on a new TV for a year because it seems thats when they’re most likely to fail. So, I actually do use them but not as often as manufacturers would lead you to believe you should.
We have had the same dishwasher, clothes washer and clothes drier for about 25 years, but I am sure the ones today are not as well made. We have a three year old refrigerator which is starting to rust on the door underneath the ice maker. Cell phone? I destroyed one by dropping it in the toilet a few years ago. Still, when I ran the numbers, I couldn’t justify the pricy protection plan when I replaced it.
I have taken out extended warranties in the past, but then I decided that it just wasn’t worth it. Sometimes the cost of the warranty was almost the same as the cost of the product, and if the item failed after a while it was simply cheaper to go out and buy a new one.
Geoff,
Agreed. But what if the replacement cost is prohibitive (as in an automobile engine)? Just curious: have you purchased an extended warranty on an automobile?
At one time here in the UK most new cars only came with a 12 month warranty. Options were available to buy an extended warranty to cover a further period of say 2 years, and I have bought those in the past. Nowadays most cars come with at least a 3 year warranty, and some now even come with one for 5 years (Hyundai for example). So, not so much call now for extended warranties on cars. Clearly there are some larger value items worth purchasing extended warranties on, central heating boilers for example. I have just bought a new computer. It cost less than £1,000, and it came with a 2 year ‘collect and repair’ warranty, so again I didn’t pay for any extension.
I can understand not buying an extended new car warranty or one on a computer. I only buy used cars I can pay cash for, so purchasing an extended warranty takes a lot of the risk out of buying a used car. I can’t think of any other extended warranties I would consider.