Extended Warranties

I just got back from The Source by Circuit City (aka Radio Shack Canada) and had to share this story. I bought a simple 20′ stereo extension cable for $19.99. I couldn’t believe my ears when the clerk asked me if I wanted to buy an extended warranty for the cable! He said that for something like $2 I could get an extended warranty and that should anything happen to the cable over the next 3 years I could get a replacement. The day they start selling extended warranties for cables is the day that extended warranties are exposed for being the scams that they are. I should have left the store right then but the whole reason I went there is because it is within walking distance from where I lived and I didn’t feel like shopping around, even though $20 was expensive for this cable. One of the reasons I went to The Source is because I don’t like to shop at Future Shop (because I hate their commission sales people and their rebates and extended warranty rackets). It looks like everyone (not just Future Shop) is selling extended warranties these days, to squeeze out every last penny they can. I bought a Palm device for my wife this Christmas at Staples (specifically to avoid Future Shop) and was propositioned with an extended warranty there as well.

I have never bought and extended warranty and never will. It only takes a little bit of common sense to realize that extended warranties are never a good idea. This CBC Marketplace article, “Extended Warranties: Deal or Dud?” examines extended warranties in detail. The final conclusion is pretty unanimous:

As a general rule, extended warranties aren’t considered a good investment. Consumer Reports, the Better Business Bureau, Canadian consumer organizations, and the Federal Trade Commission as well as the chartered accountant we spoke with, all caution consumers against purchasing extended warranties.

The nail in the coffin for me was this data:

Consumer Reports says only 12 – 20 per cent of the money paid for extended warranties is ever used to pay for repairs or claims. The other 80 to 88 per cent of money goes into the profit margin of the third-party/manufacturer.

And some final useful advice,

Our expert, Tod Marks, advises people thinking about an extended warranty to save the money and put it into a repair fund — just in case. “An extended warranty is good for the retailer. It’s not good for the consumer.”

10 thoughts on “Extended Warranties”

  1. for a cable.. yeah, that’s pretty ridiculous. but what about expensive, easily damaged stuff like a psp? wouldn’t it make sense to get one for those in case it gets dropped off a balcony or something? I suppose it depends on how accident-prone you are… and what exactly the warranty covers…

  2. chani: I see the logic, but just look at the odds. If a PSP costs $200 and the extended warranty costs $20, there would have to be a greater than 1/10 chance that you drop it to make the warranty worthwhile. The company has calculated this chance (the chance that people will drop it) and they have determined that it is actually less than 1/10 (Actually it’s probably FAR less). They then set the warranty at $20 to ensure that they will make money. So they have already done the math for you. It’s just like the insurance business. They determine the risk, then they charge premiums, just enough so they’ll cover claims and make a little bit more on top of that. Except I think in the case of extended warranties they are big-time overcharging!

  3. hmm… I suppose. my bf got the extended warranty because he has a habit of breaking electronic stuff regularly – but then he was very careful with hte psp, so nothing’s happened to it so far 🙂

    I considred getting some kind of warranty for my phone, because I’m lucky if the darn things last a year… but I never looked into it. mainly didn’t think it was worth the hassle because even if they do try to fix your phone, it’s still gone for 6 weeks or something and all your phone numbers are gone with it. easier to just buy a new one yet again…

  4. I purchased a usb drive that cost about 9 buck on sale at futureshop befor the holidays. The sad part was that they offered me a extended warranty that cost $15. The warranty was more than the product. How’s that for ridiculous.

  5. Rick: That is crazy. The device would have to break twice (2x$9=$18) over the warranty period to make it worthwhile. Extended warranties are kind of lotteries. Your chances of coming out ahead are so small, but many people get suckered in anyways.

  6. question: what about for items that you may plan to resell? apple offered to sell me the applecare protection plan to extend my laptop warranty to 3 years instead of 1. They told me that when i sell my laptop i will get higher resell value if i mention that i have applecare.

    btw, it cost $100 for extended warranty on a device that cost $1100.

  7. bahr: but will you ever be able to recover the applecare in its entirety? If you sell the laptop two years from now, there will only be one year left on the applecare. So the applecare will depreciate as well. Most people buying used laptops are more astute shoppers and would rather get a cheaper laptop without the applecare than pay extra for applecare anyways. That’s my guess anyways.

  8. Just so you know, very few extended warranties cover droppage, despite what the employees might say. Having worked at both The Source and Best Buy, I can guarantee that user-caused damage isn’t covered.

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