Extended Warranties: A Few Basic Pointers.Apr 15, 2000 Write an essay on this topic.
It seems that these days you can get an "extended warranty" on anything from a blender to carpet. In deciding whether or not to buy an extended warranty, it pays to look at "basic" motivations behind offering such a warranty.
Above all, understand this: Manufacturers and stores sell extended warranties because they are money makers! These warranties provide additional sources of income for the manufacturer/store in a segment of the retail industry (electronics, appliances and tools) that is generally dominated by very low profit margins. The price you pay for an extended warranty is carefully determined by calculating the average maintenance and repair cost of a given item (say, a washer) over the duration of the warranty (say, 5 years), and then adding an amount for "profit" to that figure. The amount of profit can vary considerably, but can sometimes be multiples of the expected repair cost, i.e. the warranty on an appliance with an expected repair cost of $70 might be sold for $250.
What the warranty actually buys you is the peace of mind that comes with knowing that your repair costs are limited to whatever amount you paid for the warranty-- a form of "insurance policy." Your decision to buy--or not buy-- an extended warranty probably will have more to do with your willingness to accept the risk of possible high repair costs than whether or not you think the washer will actually break. Most likely your repair and maintenance costs will be near zero, but there is a chance that they could run into $100s if you get a "lemon."
It's also important to realize that most breakdowns for reasons of "manufacturing defects" occur during the first few months of use-- and thus are generally covered by the manufacturer's warranty. In other words, if the hand mixer was sold to you with a cracked sprocket in the motor, it will probably break the first time you turn the mixer on-- and be covered by the manufacturer's warranty.
Now, if we look beyond your own willingness or unwillingness to deal with the "risk" factor, are there "right" and "wrong" times to buy an extended warranty?
There are certainly times at which such a warranty makes more sense than others. For example, if you're buying a mechanical product that is essentially "new" and "untested" on the market, a warranty might be justifiable. I bought one of the very first CD players when they first hit the market, and at that point nobody knew anything about their reliability or life span. As it turned out, the $160 warranty on the $800 piece of equipment was never needed. Another example would be if you expect to make unusually heavy use of a product-- for example, a CD player that will be playing around the clock in a restaurant, or a food processor you'll be using to mix large batches of dough to bake for the entire neighborhood-- every day. In the latter cases, though, be sure to read the fine print where it talks about "normal wear and tear."
Most of the time, extended warranties make less sense. This is especially true for products that have been extensively distributed for many years, and may even have been written up by a publication such as Consumer Reports as "very reliable."
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