Why are Extended Warranties not Normally Worth the Cost?

 
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If you read comments on the internet, people seem to agree that extended warranties are not worth the cost. But is that really true? The value of extended warranties has decreased in the last several decades—in part—because companies are manufacturing more reliable products. That said, there may actually be some instances where it makes sense to purchase an extended warranty. What are these situations? Keep reading to find out.

Why Do Dealers Sell Extended Warranties?

Extended warranties are becoming a more and more important source of revenue for merchants—like car dealers. In some industries, sellers may be in a position where they hardly make anything off of the initial sale. Some products even get sold at a loss on the hopes that the merchant will be able to upsell the customer on other products.

Extended warranties provide sellers with an advantage over other upsells because, depending on the terms of the warranty, the likelihood of them actually being used by the consumer is not especially high—meaning they profit. Even if a claim is made against the warranty, it may end up being less than the cost of the warranty. Still a win for the seller.

Why Do Warranties Cost So Much?

The real cost of a warranty should be figured based on the cost of the item and the likelihood that the product will fail within the duration of the warranty. Extended warranties are always more expensive than this, however. This is because the company selling the warranty needs to make money off the cost.

What Does an Extended Warranty Cover?

This varies from warranty to warranty. Generally though, they cover product failure up to a certain length of time past any original warranty. They rarely cover normal wear and tear or regular maintenance items.

There are two major types of extended warranties, inclusive and exclusive. Inclusive covers everything, except things that are specifically excluded. The exclusive warranty covers only that which is explicitly stated. There’s going to be quite a price difference between these types of warranties. And warranties that list exclusions will be easier for you to understand when compared to ones that only list inclusions.

If I Want to Buy an Extended Warranty, What Do I Need to Know?

If you wish to get an extended warranty, there are ways to make sure you get the best deal possible. You’ll want to do things like:

  • Shop Around: You don’t need to buy the extended warranty from the merchant that you purchased your product from. For products like cars, you may be able to find a number of companies offering third-party extended warranties. You’ll also need to compare extended warranties with an eye towards things like how you’ll be reimbursed for the repairs, if you’ll be reimbursed at all. Some warranty issuers work directly with the shop to handle payment.
  • Wait to Buy: You may be able to buy extended warranties for your products a little further down the road. Generally, this is cheaper than buying the extended warranty when you first purchase the item. As the product gets older, the warranty normally gets cheaper.

When You May Want an Extended Warranty

There are actually a few places where you may want to purchase an extended warranty. For example, if you’re purchasing a product that has a reputation for failing, the extended warranty may be worth it. Just be sure it will cover the parts of the product that are likely to fail. You should also be sure you verify exactly where your product can be serviced. If you must haul it 200 miles to an approved service station, you may want to reconsider going with that seller’s extended warranty.

Alternatives to Buying an Extended Warranty

As an alternative to extended warranties, you could put away half the money you would’ve spent on the warranty. Then, that money will be available for repairs down the road. And if you can invest the money in the meantime, you’ll even earn interest on it! This can save your bacon if the service company you bought the extended warranty from goes belly up. That’s another issue with extended warranties; if you get them from a third-party, you’ll be out of luck if the company goes out of business.

Now that you know a little more about extended warranties, you can decide if they’re not worth the cost, or if it would be a good investment for you. Extended warranties are used by dealers as a way to potentially get a good upsell out of a customer. That said, it’s possible that they could really save your bacon one day. If you aren’t sold on an extended warranty, you can certainly purchase one down the road. Or simply take the money it would’ve cost you and store it away in case you do have a major failure of your product.

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