The Only Extended Warranties I Usually Buy

June 12, 2015

I am not normally a fan of extended warranties on many things.I once worked with someone who owned car dealerships and in discussing their business, I learned that the extended warranties have very high profit margins so the consumer in me said “if the profit margins are that high, they probably aren’t a good deal for me as a buyer.” I usually opt out of the warranties on relatively durable goods like a car, washer/dryer, microwave, etc. So far, it hasn’t come back to bite me (so far…). However, I do give consideration to buying the warranty on less durable things, like electronics (laptops, TVs, etc).

I decided to use my friend Google to look around for good articles about extended warranties and found a  Consumer Reports extended warranty buying guide. A USA Today article reaches a similar conclusion about extended warranties. That conclusion is that you’d be better off putting the money you’d spend on a warranty into a savings account and use it for repairs when things break down.

Recently, however, something happened that made me very thankful that I purchased a warranty on a particular product. I travel for work a lot and on my last trip, my daughter drove me to the airport in my car so that her car could be taken to the mechanic to have some repair work done and she could drive my car while I was away. I felt good knowing that I could help her out and it was nice to spend time in the car with her talking about life. It was a great ride to the airport.

Later that night, I got a text message from her asking if I had AAA. I called her to make sure that she was okay and to see what happened. There was a flash flood warning and she was driving to her boyfriend’s house on back roads near a stream that routinely floods in the midst of that. (We talked about the significance of flash flood warnings after I got back to town.)

During her drive, there was debris all over the road and she ran over something (it was dark, windy, pouring rain and on that road, trees usually come down if the storm is wicked enough) and blew out a tire. The road wasn’t very conducive to changing a tire in those conditions, so we called AAA and they came out to help her. She got home safely and all was well…except for my tire.

Here’s the thing. I had just bought new tires less than a month earlier so the tires had only a few hundred miles on them. Fortunately for me, I had purchased the “road hazard” warranty which replaces tires based on a formula (percentage of tire tread left times price of replacement tire). With 100% of the tread left, I was able to get a $200 tire replaced at virtually no cost. I had to purchase a warranty on that particular tire, but that cost was negligible. This is the second time I’ve used a road hazard tire replacement and the last time it saved me about 80% off of the replacement tire.

As you are out in the world making purchases great and small, you will inevitably asked to purchase extended warranties. Before saying “yes” and spending money that you are very likely to never recover, give the two articles above a quick read and ask yourself about the likelihood of each item breaking down. For durable goods, which are usually high cost, the cost of the warranty is usually significant and the likelihood of the product failing is rather small. That’s not a great recipe for the warranty being a wise decision.

For other items, look at the products with high failure/loss rates (tires, cell phones, etc.) and walk through both of these scenarios: 1) you buy the warranty and the product lasts a long time and the warranty is never used and 2) you don’t buy the warranty and the product experiences a failure in the short term. Can you handle the replacement cost? How much is the cost of the warranty over the expected life of the product? Can you make better use of that money than the selling company can?

I have warranties only on tires and cell phones. At least, I think that’s it. And, I’ve used the warranty on both items and it’s saved me several thousand dollars over the life of those products, at a cost of maybe $400. That’s a fairly significant return on my dollars.  Remember, every dollar counts so let your dollars work in your favor rather than in favor of your friendly local retailer.