Making a big purchase? One expense you may forget to factor in is an extended warranty, which can cost you an extra $20 to $200.
When are they needed and when are you being fooled? In theory, extended warranties seem like a good idea, you don't want to get stuck paying a ton of money on a product you already paid for if it breaks. But according to researchers, in almost every case, it's not worth the extra money, especially when buying electronics and appliances.
Research shows service plans have become a $40 billion business. Two-thirds of in-store electronic shoppers and three-quarters of appliance purchasers say that an associate has pitched one to them.
A study done by Stanford University found that consumers typically overpay for extended warranties because they overestimate the chance a product will need repair.
Extended warranties are insurance contracts that protect against the failure of a product. In an economic study done, researchers found when consumers were given information about the chances a product may fail, most of the time they decided an extended warranty was not worth the money. That's because today most appliances and products are reliable.
A study from two Northwestern professors found the failure rate of most new TVs is as low as four to six percent, but most companies will try to make the extra sale anyway.
"It could be that even if a particular product is solid and won't break down, a particular company might try to sell you the extended warranties still, so you want to take that into consideration and realize that if it is a product that is going to stand the test of time, you may not want that extended warranty," said Leah Napoliello Vice President of Operations at BBB Houston.
If you still want to purchase an extended warranty, here's what you should consider.
Understand the manufacturer's warranty before making a purchase. You are required access by federal law before making a purchase. Check how long the manufacturer's warranty is guaranteed.
Check if you already have extended coverage through your credit card. If you made the purchase through your credit card, the card issuer may extend the warranty for up to a year.
Read the fine print. Many warranties come with a ton of exclusions that may make the payment plan useless to how your product could possibly fail. For example, coverage may not include accidental damage.
According to autotrader.com, there are two types of extended warranty coverage for vehicles: inclusionary and exclusionary. Typically they say you want exclusionary, so you know exactly what it will not cover. It's typically the more pricey option and you still want to read it line-by-line to make sure the really expensive items that might fail are not excluded.
"If you are signing up for an extended warranty, read all the details in terms of conditions very carefully. Some things may not be covered at all. Something may be covered, but it's important to get all of that in writing so you know exactly what the coverage is," Napoliello said.
Researchers found it is worth it to get an extended warranty on smartphones since our phones are always with us and the most common failure is the screen cracking.
Still, make sure fixing the screen is offered under the extended warranty.
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This is the 1 item you'll want to protect with an extended warranty