Are Extended Warranties Worth It? Harvard Debates Consumer Reports

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Who do you think knows more about business? Consumer Reports, or the Harvard Business Review? Think carefully before you reply, because upon your response hinges the answer to another question:

Is it a good idea to buy an extended warranty, or not?

Let Us Present the Arguments

According to Consumer Reports -- the shopping bible of thrifty Americans everywhere -- there are precious few instances in which it pays to buy an extended warranty on a product you purchase.

Citing "extensive research" from years of study, and feedback from its tens of thousands of members, Consumer Reports argues convincingly that when an appliance breaks, it usually costs about as much to get it fixed or replaced as it would have cost to buy an extended warranty.

Seeing as the purpose of buying an extended warranty is to get an appliance fixed or replaced years in the future, when dollars are worth less due to inflation, you probably wind up losing money on each extended warranty that you purchase.

That's if you're lucky.

Because as CR points out, even when consumers do buy extended warranties, they don't always get to use them. This is because manufacturers and retailers get to pick the time periods for which they sell warranties, and pick the level of quality they build into a product.

Combine these two abilities with the oodles of data they've collected from years of past product sales and warranty repairs on those products, and a warranty-hawker is well-positioned to make sure any warranty that it sells expires before the product actually breaks.

Result: According to CR, "most repairs do not occur during the limited time period covered by the extended warranty."

But Before You Decide ...

Clearly, CR is not enthused about this whole extended warranty thing. And yet, a just-as-esteemed publisher -- the Harvard Business Review, via its Blog Network -- says that Consumer Reports is wrong to knock 'em.

In a column last year, pricing strategy consultant and HBR blogger Rafi Mohammed took CR to task for making a "blanket judgment" that extended warranties are a bad deal. (Consumer Reports did in fact concede that in some circumstances extended warranties are warranted, such as when buying a repair-prone brand where the warranty is comprehensive and cheap.)

However, according to Mohammed, "not only poorly informed people ... are duped into buying" extended warranties ... because he "often buy[s]" them too!

Mohammed argues that even though Consumer Reports' basic point that extended warranties are rigged in favor of the seller is correct, there's still value in the product because:
  • Being a fixed-price product, an extended warranty limits the risk of a surprisingly big repair bill.
  • Under a warranty, repair is the warrantor's responsibility, so a customer needn't find his or her own repair shop.
  • Some warranties offer extra conveniences, such as free on-site repair.
In illustration of which, Mohammed offers up the example of his own Dell (DELL) notebook, which broke down "not long after" he purchased it. Because he had bought a warranty (for about a third of the cost of the computer), Dell repaired it 24 hours later, on-site. And good for him, but ...

If you look at this situation from a slightly different perspective, what really happened here is that: First, Dell sold Mohammed a POS* computer. Then Dell charged him an extra one-third of the sticker price for an optional warranty. Finally, Mohammed was "lucky" enough to get to use that warranty.

That hardly seems a glowing endorsement for either Dell or its warranties -- especially since the notebook broke "not long after" Mohammed bought it, and so repair was probably already covered (for free) under the manufacturer's warranty. Even if the notebook took a bit longer to break, if it was bought with a credit card, repair would likely have been covered under the warranty-extending features of most MasterCard (MA), Visa (V), and AmEx (AXP) cards -- again, for free.

Get What You Pay For

Granted, the on-site repair and 24-hour service of Mohammed's Dell warranty sound like nice features -- although not even all Dell warranties offer such service. But this actually raises another point: cost.

According to Consumer Reports, stores tend to earn 50 percent or better gross profit margins on warranties they sell. That's more than twice what Best Buy (BBY), for example, grosses on actual merchandise that it sells.

That fact right there tells you that most warranties probably aren't worth the price. The high profit margin on this "product" tells you it's not costing the stores much to offer warranties. Whether this is because the services included aren't as valuable as Mohammed suggests, or because most warranties expire unused, either way, if you do choose to buy an extended warranty understand that chances are good that you're simply paying for peace-of-mind and probably not much else.

* POS = "Presumed to have an Operating System."

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends American Express, MasterCard, and Visa. The Motley Fool owns shares of MasterCard.


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52 Comments

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goosedudegoose

Well....as a squaretrade customer for years.......Looking at the warranties that I purchased that expired and I have never used of the 11 I have purchased......10 have now expired with no issue with the variety of products from laptops, TVs, stereos, Tablets, appliances, etc. I have also in the past gotten the extended warranty on some items directly from the manufacturer (Video game consoles, HDTVs) and only had to use the warranty once on a bulb burnout on an old style projection HDTV. Other items have been covered because the doubling of warranties by AMEX.

Have to agree with the article.......while the extended warranties provide peace of mind, 90% of the time you will never have to use them.

June 10 2014 at 9:38 AM Report abuse rate up rate down Reply
ryan.kidman

I like to get the extended warranty because I can just bring the product back to the store where I bought it and leave it with them as their problem, no shipping, no phone calls, etc. I enjoy lifetime warranties on many of my auto parts and extended on most everything gadget I get from Best Buy, including this one I'm typing on right now. AMT Warranty Corp offerings and capabilities, including extended service plans, manufacturer warranties, and Protect-it™, our turnkey warranty card program.

May 20 2014 at 1:28 AM Report abuse rate up rate down Reply
petesehria

Here's what nobody is mentioning. It's not if one thing broke down. Take all the things you buy with extended warranties. Add up all that money you saved. So if one thing broke down you still saved by never buying any warranties ever.

June 10 2013 at 9:39 PM Report abuse rate up rate down Reply
byrdman53

Screw extended warrantys , If your product breaks dont buy another one and tell as many people about it as you can. Life time warranty? Whoes life time ? Mostlikely you wont find your receipt or you have to mail something back that will cost as much as the item did.

June 10 2013 at 3:02 PM Report abuse rate up rate down Reply
Heymickr

We live in the LA area and occasionally buy an extended warranty if the product is one we don't want to trash if it becomes defective. We know that with one call the warranty company will send out a qualified repair person and there will be no charge. Otherwise just finding a trustworthy qualified repair person is all but impossible and then you wind up paying for his drive time which in the LA area can be hours. I suspect that overall we've come out ahead financially but I know we've come out way ahead on the stress and aggravation factor when a big ticket item goes bad.

June 10 2013 at 2:38 PM Report abuse rate up rate down Reply
nrthchrlt1

The basic criteria should be: what will keep the actual cost of the item the lowest overall. My vote is not to purchase the extended warantees.

June 10 2013 at 2:08 PM Report abuse rate up rate down Reply
hlsjogren

I LEASED A FORD WINDSTAR FOR 3 THREE YEARS AND THEN BOUGHT IT AND GOT EXTENDED WARRENTY. FOR 60.000 MILES OR 3 THREE YEARS. WELL. THE TRANNY WENT AT 39.000 MILES. THEY REPLACED WITH A NEW TRANNY. PLEASE NOTE THAT 2001 TRANNY'S WERE BAD TO BEGIN WITH. SURE GLAD I DI GET THE WARRENTY.

June 10 2013 at 12:04 PM Report abuse rate up rate down Reply
1 reply to hlsjogren's comment
byrdman53

Next time buy a GM product, thier transmissions are warrantyed for 100,000 miles, thats what happens when you buy Fords.

June 10 2013 at 3:07 PM Report abuse rate up rate down Reply
tideh

I never buy extended warrenties the few times in the past when I did it wasn't worth it and didn't cover everything have to really read that fine print. But in the long run they are not worth the paper they are printed on.

June 10 2013 at 10:42 AM Report abuse rate up rate down Reply
elliotu

I tend to buy extended warrenties on items that have moving parts and are used a great deal. For example, I bought a computer printer/Lexmark from staples. It was contantly not working well and they fixed it each time and before the extended warrenty ran out, they informed me that they would give me my money back or close to it in order to buy a new priner made by a different company. I got value from the warrenty.

June 10 2013 at 9:33 AM Report abuse rate up rate down Reply
Stephen Sklar

Let's face it. Extended warrenties are profitabl to the mfg. thaat is why they sell them.
You should not buy it IF you can afford to assume the risk of breakage.

June 10 2013 at 9:10 AM Report abuse +2 rate up rate down Reply