Should you buy an Extended Warranty Service Contract for Appliances?
Extended Warranties are Big Business
It is a hot topic. Extended warranties are big business. Every sales person has been trained to ask if you would like to pay a little extra for an extended warranty. Every time you buy any appliance from counter top, to major appliances, you will undoubtedly hear, "Would you like to purchase a service agreement that covers everything for an additional year for a small price?"
The reason is that there is a lot of money to make by selling "peace of mind." Extended warranties are great when you need them, but do you really need them?
It is obvious that companies do not sell something without a profit. I found this out when I bought a new "used car" and was offered an extended warranty that would cover an additional 50,000 miles for 5 years for $2,400. I thought that was rather expensive and declined. The dealer then offered a second warranty that he just happened to think of that could provide the same additional protection for $1600. Then he told me that the first time the computer went out on the car, I would have at least that big of a bill or more. I once again declined and then it was offered to me for $800. I then bit and bought the dang warranty. It made my payments about $20 a month more and was in my budget. I never did use it.
Let's look at a couple of scenarios that might make it easier to decide.
Are You a Good Money Manager?
You are like me and don't save enough money to go out and buy new much of anything. So when I buy, I do it on credit and don't have enough money to buy extras or pay for expensive repairs, I might be back to garage sales looking for old appliances that I can refurbish and get working again.
For me, the extra payment on a washer/dryer might be a deal breaker. I usually decline the extended warranty simply because I don't think I can afford it. I reason that the warranty on the new item will catch any defective product and that the extened warranty is simply not needed once the machine has been working properly for the first year. With care and proper use, the machine should last several more years.
Do you Like Paying Double?
You like to have a more secure feeling with your purchases. Let's say that you bought a washer for $1000 and that the going rate is about 10% for an extended warranty. The first year is covered by manufacturer warranty, the 2nd through 4th year are covered by $300. The average life of a washing machine is 11 years, at which time you would have spent, and additional $1000. In the average life span of the washer, you have paid double the price.
If you were well disciplined, you could save $100 a year in an interest bearing account and collect that. The money could be used to repair any appliance saving the cost of extended warranties on 5 major appliances. For example, refrigerator, stove, dishwasher, washer and dryer. Chances are that most of them will work without need of repair for 5 to 10 years. You are insuring yourself. If the extended warranty was being collected on all of them you would be paying around $300-$500 a year for extended warranty. Saving $400 a year for 5 years will undoubtedly be more than enough to take care of any repairs. At the end of 10 years, you might have $4000 plus interest that can be invested in new appliances.
The bottom line is that if your are disciplined and can save for those repairs setting aside the money to be used for appliances, you will be far ahead of the price of warranties. You are accepting the risk that goes along with owning machines.
If you want someone else to take on the risk, then you will have to pay them. It is no secret that the risk is profitable for them.
A surprising statistic is that 100% of the reported profit for a couple of large retailers is due to extended warranties, they make no other profits. The return on these warranties is around 70%.
However, if you do not have discipline like me, it might be OK to accept the costs on one or two higher priced appliances.