Buying an extended warranty is generally a bad idea

Buying an extended warranty makes no senseSo you’re looking at purchasing something larger such as a stroller and considering purchasing an extended warranty even though you’re seeing nothing but rave reviews? Uh, you should reconsider it. Buying an extended warranty is a gamble, and when a company gambles, they play the odds well in their favor.

This post came out of someone suggesting that a product had no faults that I’ve discussed (and documented with pictures) and then saying to buy the extended warranty – it was not the first time I’ve heard this brand of logic, however it was the first time I’ve ever had it happen with someone who was not attempting to sell the product to me (although she might have been considering she was disputing my running review, who knows…)

So, extended warranties work like this – a third party company usually insures against a small subset of damages based on the belief that the product they’re offering the warranty on will never fail and they’ll be making bank for nothing. These warranties generally kick in well after a legitimate company’s warranty expires – for example, Britax has a two-year warranty against defects in many of their strollers.

In the third year, after you’ve probably forgotten you had this warranty, something happens to your product, which is now out of date, and most likely if it’s survived this long the problem you’re experiencing is normal wear and tear, which is not covered under most extended warranties – only manufacturing defects.

Much like car extended warranties, they’ll cover the parts they’re pretty certain will never fail, and are useless against anything that’s likely to die within the coverage term.

Warranty companies don’t make money unless the average consumer loses money, and that’s a basic economic fact you have to understand. This is not subjective, this is their business model. They bet, and you can too, that what they’re offering to replace or fix isn’t going to break, and if it does that it’s probably discountable as wear and tear.

I’ll never forget an incident in which ITMama was purchasing a $99 record player and the sales person at HH Gregg was attempting to sell a $30-50 extended warranty. The player had a one year warranty on parts and labor so we said no. That was six or seven years ago now, the price to have extended that warranty to now would have been about $150, and the thing still keeps going on.

There may be exceptions where extended warranties make sense, for instance I deal with a horrible house warranty company, and due to their excessive mismanagement and hiring of incompetent contractors unless I miss my guess I’m well ahead of the game, but most are designed to cost you money, and that’s the business model.

Skipping out on a couple of warranties can save you enough to get something else, or save up for when you actually need to replace or fix something.

I’ll never forget my insane Volkswagen extended warranty – bumper to bumper power train and most of the car… but that didn’t cover the defective bearings in the wheels as they were considered wear and tear, nor did it cover the defective car, what it cost me was more than the car was worth and what it got me was nothing.

And that’s what most people get out of an extended warranty, nothing. And they don’t think about that most people don’t. They just see that one person who thinks they got lucky because they’ve been purchasing extended warranties on everything and one finally paid off.

And that’s that… don’t buy this crap for your kids’ stuff, if it’s a good product it doesn’t need it and if it’s a bad product you shouldn’t want to get it in the first place.

Dave Ramsey has some other good points on this, whether you agree with his views or not, on this he’s right.