Extended warranty appears to have little payoff in the end

Sometimes policy costs more than the repairs

Dollars & Sense

January 06, 2002|By Jeff Gelles | Jeff Gelles,KNIGHT RIDDER/TRIBUNE

It's as predictable as paying sales tax: Shop for a big-ticket item nowadays - a camcorder, say, or a lawn mower or household appliance - and sooner or later you're bound to face The Question.

"Would you like to sign up for an extended warranty?"

It slides off the salesperson's tongue as smoothly as "Would you like some fries with that order?" at a fast-food restaurant. But money-wise, there's a lot more at stake.

Signing up for protection on a VCR, vacuum or dishwasher will set you back an average of $75, according to a survey by Consumer Reports. For a projection TV or a lawn tractor, warranties average $300. It can be a budget-busting moment. If you've set aside $400 for a camcorder, and found one at your price, it's dismaying to suddenly face the question of paying an extra $150 for a warranty.

Well, here's a suggestion that may save your budget: Just as you might resist those fries, you may want to say "No, thanks" to the extended warranty.

The salesperson will portray buying it as the cautious, prudent thing to do. But you'd do well to view it as the opposite: an impulse purchase that's likely to be a waste of money.

That's the considered judgment of the folks at Consumer Reports, who have evaluated extended warranties repeatedly over the years and always come to the same conclusion.

The logic boils down to this: Statistically speaking, consumer products don't break very often in the one to three years typically covered by such warranties. If there's a true flaw in the product, it should show up quickly enough to come under the basic warranty.

But what if something does go wrong - doesn't it at least pay off then?

Not likely, says Consumer Reports senior editor Tod Marks.

One reason, he says, is that warranties often exclude problems that are arguably your fault - say, if you drop the camcorder or put the battery in backward. Another is that repairs, if you need them, may not cost more than the warranty itself.

For a microwave oven, for instance, the average extended warranty cost $85, and the average repair cost $90, according to Consumer Reports. But consider this: In three years, only 5 percent of those ovens needed any repairs. Nineteen out of 20 purchasers paid nothing at all for a repair.

Even for products more likely to malfunction, the bargain is questionable. The survey said 39 percent of personal computers needed repairs within three years, at an average repair cost of $200. That's more than the $145 price tag for the average PC warranty, but remember: Six out of 10 buyers didn't pay anything for repairs.

"For most products, we found that the cost of the warranty exceeded the cost of repair," Marks says. Won't you be sorry if a product breaks down completely?

You might be. But that's why it pays to ask yourself how often that's likely to happen.

An extended warranty is an insurance contract for a product. But unlike auto or homeowners insurance, purchased to guard against catastrophic losses that could drive you to bankruptcy, there's a built-in limit to your potential loss with a product: the cost of replacing it.

Are there ever situations where buying an extended warranty makes sense?

Automobiles may be one, because repairs can cost thousands of dollars. Personal computers may be another - not because of the repair costs themselves, but because some computer warranties include free technical support.

For most consumer products, Marks suggests "a rainy-day repair fund." Instead of buying all those warranties, put aside the money you save. When the rare breakdown occurs, you'll have cash to get it fixed or replaced.

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