Are Extended Home Warranties a Good Idea?

Did you know, in most cases, the extended warranty is not worth it.

Purchasing a large ticket item can be a stressful experience. There is research involved, shopping for the best deal and finally contemplating whether or not to purchase the extended home warranty that the cashier pushes on you when its time to pay.

In most cases, the extended warranty is not worth it.

In the last decade extended warranties or service contracts have become increasingly popular. While frequently referred to as an extended warranty the Federal Trade Commission actually refers to them as service contracts because at their heart they are contracts for continued service, beyond the original manufacturer’s warranty, for a fee.

In most cases purchasing an extended warranty is not a great idea as there are often exclusions and the coverage may overlap with coverage offered by the manufacturer under the original warranty.

Let’s have a quick look at the various issues with service contracts and if any of them are actually a good value:

Overlap

In many cases, there will be overlap between the manufacturer warranty and the service contract, this is especially true with new cars. Most new cars come with at least three years or 36,000 miles of coverage and some components like the transmission are often warrantied for up to 100,000 miles.

Most major appliances and electronics come with at least one-year of warranty service. Be sure to verify the service dates of any extended warranty you are considering. If there is any overlap with the original manufacturer’s warranty, it is not a good deal.

Credit Card Extension

Many credit cards are offering extended warranties as one of the benefits for the cardholders. In most cases the extended coverage is put in effect simply by paying   for the item with that particular credit card. If this is the case with one of your credit cards, purchasing an extended service contract rarely makes sense.

Narrow Windows of Coverage

The majority of extended warranties offer a narrow window of coverage, usually limited to 2 to 3 years. Most high end electronics and appliances built these days will run problem free for the first three years or more of their life which often means problems will start after the extended warranty has expired. Look for extended warranties that last 5 to 6 years. 

Types of Extended Warranties

Depending on what type of item you are buying, an extended sometimes it might make sense. Here are a few different types of warranties and whether or not they are good value.

• Automotive: Most experts consider extended auto service warranties as a profit center for the car dealer. They can be an expensive gamble for you and even if repair turns out to be necessary it brings the vehicle back to the dealership.

In 2013, Consumer Reports did a survey of 12,000 shoppers who had purchased extended auto warranties and found that a whopping 55% had never used it. If a large one-time repair bill will cause you financial stress then an automotive extended warranty may make sense. Carefully read the fine print looking for exclusions as some contracts exclude expensive repairs such as a transmission.

• Home Warranty: A home warranty is rarely worth the cost, especially on newer homes. If your house is less than 10 years old, experts strongly recommend not purchasing a home warranty. Most issues would be covered under the builder’s warranty, or the manufacturer warranty on any major appliances. If damage occurs due to accidents or weather related issues, your homeowners insurance should step up and pay for damages.

If your home is older than 10 years old, or the appliances are ancient, it’s possible that a home warranty would be worth the money. Check all details of the warranty and make sure there is no exclusion for major appliances.

According to experts, most homeowners are better off setting up a home repair fund in an interest-bearing account rather than purchasing a home warranty. This way if something major does happen they have the money on hand to cover the expense.

• Technology and Appliances: Experts do not recommend purchasing an extended warranty for appliances or technology. While most stores will pressure you when buying an appliance or electronic device to buy the extended warranty, in most cases the device will not break down during the extended warranty phase. Experts recommend turning down extended warranty on these types of purchases.

Final Tips

Here are a few final expert tips on what to do to protect you instead of purchasing an extended warranty.

• Self-Insure Your Purchases: Take the money that you would spend on extended warranties and put it in a savings account that pays interest. This way if something does happen to one of your appliances or there are other major expenses you will have the money to cover the costs. However, if there are no issues with your devices you still have that money available to you for other purchases.

• Always Research Purchases: Buying high-quality products will help prevent breakdowns or product failures. Before purchasing a large appliance or other expensive electronics research your options, read reviews carefully and check professional publications such as Consumer Reports.

• Check Manufacturers Warranty: Another thing that you should check before making a major purchase is the manufacturer’s warranty. Choose a product that not only gets great reviews but also has the longest warranty, and a warranty that covers a broad spectrum of repairs and parts that can fail.