EXTENDED WARRANTIES: Are they worth it?

You buy a new piece of technology, perhaps a digital camera, or a lap top or even a new flat panel TV. A question is posed to you by the salesperson,"Do you want an extended warranty?" Uncertainty grows in you mind. Is it necessary? Will the item break and then cost me a bundle?

It's poser. You're not alone.

Americans will plop down over $9 billion in extended warranties this year. For the most part it is wasted money.

Why?

For every 100 people who buy an extended warranty only 15 will use it. This is a huge cash cow for the industry. No wander they are pushing you to buy one. It makes all the sense in the world, to them. That being said, this Frugal Yankee has purchased one of these warranties and it has paid off handsomely.

So how do you decide if it is worth it or not?

As with anything, a little knowledge, a few smarts and asking the right questions will point the way for you.

Most items come with a manufacturers guarantee. The coverage may be for only 30 days or it may be longer. Ask the salesperson. They should know. If they don't, you  probably shouldn't be buying anything from them anyway?

The second but of info needed to render a frugal decision is how are you buying this product? If you're using a credit card, your credit card company may have a built in warranty or the may double the manufacturers warranty. If it does, buying one from the store doesn't make a whole lot of sense.  You can get this info by calling customer service.

Here's another morsel of info, your home insurance may also provide coverage. Check with your agent, they would know in a heart beat.

There you have three mighty big chunks of info which can shape your decision making process. Of course, the store salesman would never tell you that.  Did you know the salesman in many stores make a bigger commission on extended warranties than on the sale of the product being sold?

OK, so let's say none of this is available to you. Should you purchase the extended warranty?

The markup on a warranty can reach as high as 300%. With that kind of incentive, retailers are pushing their sales staff to push you to buy one of those warranties asap. Guess what, most of the warranties can be purchased 30 days AFTER the sale. Figuring you have at least 30 days form the manufacturers guarantee, it makes all the sense in the world to take the contract home and read it carefully. You'll be amazed at some of the fine print.

More importantly, when you purchase an extended warranty you are betting the item will break sometime between the regular warranty and the extended one. This is between one and three years. Studies by various consumer groups have found this doesn't happen with most items. Additionally, if it does, the chances of the repair exceeding the cost of the warranty is slight.

Let's toss in another factor. How long are you really planning on keeping the item purchased. If it is less than the extended warranty, you're losing money. For example, if you purchase a cell phone, in all likelihood you will update that phone in about two years. Product upgrades, new service options and better calling plans all will influence this decision.

Going back to the fine print, be sure you focus in what is covered and what isn't. If you drop your lap top, is the screen covered? If you're cell phone goes down the toilet (this happens far more than you would imagine) is it covered? Most likely, not.

OK, we've bashed the extended warranty around, and as I said before I have had good luck with them. So why did I purchase one?

My warranties revolve around my lap top. I plan on keeping mine for four years before I will get a new one. The warranty I have does cover the screen. My last laptop's screen went south three days before the extended warranty ended, and the computer company handled it extremely well and I was back up and running with a new screen, installed by them in 72 hours.

An item to check out that makes extended warranties worth while is if they promise to do maintenance for free. Maybe a yearly check up. This is areal added bonus.

If you do decide to buy one, never pay more than 20% of the purchase price, and maybe even shop around. Some warranties are out sourced to third party companies. You maybe able to get the same policy form the same company by going directly to them, cut out the middleman saving you some money.

Are there any rules of thumbs as to which products you should or should not buy a warranty for? Yes.

Don't buy one for refrigerators, stoves, and any other major appliance. These are sturdy and don't break too often. Digital cameras is another one. Less than 10% of the cameras purchased in the past three years have had repair issues. The odds are in your favor.

When it comes to laptops, we say yes. When it comes to desktop computers we say yes if it comes with tech support and maybe maintenance. When it comes to TVs, that's a toss up. Flat panel TVs are solid, but rear projection TVs have problems with bulbs prematurely burning out.

The general rule is, extended warranties are not worth except in some specific cases.

From traditional tips to savvy perspectives, the Frugal Yankee knows how to enjoy life and spend less. Find out more by going to FrugalYankee.com.