7 reasons to avoid extended warranties

I’m a little on-edge when I go shopping these days, especially when it comes to extended warranties.  A pitch has always been common when buying big ticket items, but lately I’ve noticed retailers go even further to push extended warranties on unsuspecting customers.

Now they're offering extended warranties on small appliances, laptop computers, toys, and even on $5 batteries.  According to Consumer Reports, extended warranties are notoriously bad deals for consumers. 

Here are seven reasons to stay away from extended warranties:

1. Many credit cards double the manufacturer’s warranty when you charge retail purchases to the card and register the product..
2. When you finance the amount of the extended warranty, you are paying interest on the cost of an agreement that won't be in effect for one to three years.
3. Customers pay for the extended warranty in advance, even though it won’t be in effect for one to three years.
4. By the time the extended warranty takes effect you may have lost, sold, or replaced the item.
5. The extended warranty does not typically cover normal wear and tear, rough handling, or in the case of some electronics – actually dropping the equipment – which in reality are the major causes of defects.
6. The cost of extended warranties is astronomical compared to the amount of money retailers pay for the actual repairs. Experts suggest that less than 20 per cent of all extended warranty sales collected by the retailer are paid out in repairs. The rest is profit.
7. Sales people are paid huge commissions for pressuring you into saying yes to extended warranties.

I tend to be wary of commissioned-sales staff because of an experience I went through at a national furniture store.  I was pressured to buy $250 extended warranty coverage on a $700 plasma television that I purchased.  When I refused, they sent the manager over to try and convince me that it was a good deal. 

The pressure didn’t end there.  Before the warranty was about to expire, I started receiving phone calls from the retailer giving me one last chance to buy the extended warranty plan.

The real purpose of extended warranties is to increase the store’s profit at your expense.  The extended warranty pays the cost of repairing the item you purchased after the manufacturer’s warranty expires.  It’s a product created and sold by the retailer, not the manufacturer.

Also Read:

One more reason to avoid extended warranties

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Robb Engen is half of the Boomer & Echo personal finance blogging team with his mother, a former financial advisor.  Reach him at robbengen@gmail.com