Buying a new plasma TV, surround-sound audio system or PC or Mac?. Retailers like pushing extended service warranties hard, but they’re almost always a terrible deal. Here’s why: warranties are a lucrative business.
It’s estimated that retailers earn 60% margins on extended warranties, far higher profits than those stores earn on selling physical goods. But in many cases you don’t need to pay extra for a warranty.
Many items include a one-year warranty for parts and labor. With prices of TVs, audio equipment and other consumer goods falling rapidly, it might not be worth repairing an item in the second or third year of its life, so why pay for the warranty?
Many credit cards extend (often double) the manufacturer’s warranty for free. Check the terms of your credit cards before you make a large purchase, and make sure to use the credit card with the best warranty extension.
Many types of items simply don’t break that often. Defects are often obvious within the first few days, in which case you can return the item to the store. Many manufacturers devote considerable effort to reducing the number of moving parts and other items that cause problems or suffer from defects.
Even if the item does break, the cost of repair is often much less than the cost of warranties sold by stores. Consumer Reports estimates that a vacuum cleaner or lawn mower can be repaired for less than two thirds the cost of a three-year service contract.
If you decide that you do need to pay for a warranty, shop around. Often the manufacturer of the item itself will offer an extended warranty that’s considerably cheaper than the one offered by a retailer for the same item.
The Bottom Line? When you add these points together, buying warranties from retail stores is usually a losing proposition for most shoppers. Given that the first year’s warranty is free from the manufacturer and the second year’s warranty may be free from your credit card company, you’ll be paying richly for a one-year warranty for the third year of a product’s life. That’s why retailers make so much money from warranties. So in most cases, it’s better to skip the warranty and to save the money.
