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Spending Smart: Extended Warranties Warrant a Closer Look

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By Gregory Karp

warranty_terms_of_service(MCT)—Do extended service contracts warrant your attention and your dollars?

It’s a question that comes up time and again. Seemingly whenever we buy anything of value, a salesperson suggests that we should buy an extended warranty, sometimes called a service contract.

There’s a good reason warranties are offered so often — they can be very lucrative for sellers. But are they a good deal for consumers? The short answer, says many consumer-interest groups, is “no,” or at best, “not often.”

Consumer Reports, for example, recently says of extended warranties: “Chances are that what you spend will be money down the drain.” It found the median price for in-store electronics warranties was $75, while a major appliance warranty cost $118.

But it’s difficult to write off such service contracts altogether because of the peace of mind some people might get from a longer or more robust warranty. That’s difficult to place a dollar value on.

Many finance experts espouse a simple rule of thumb: Don’t buy insurance — or extended warranties — to protect yourself from small-dollar losses. Insurance is for financial disasters. Dropping your cellphone in the toilet is annoying and inconvenient, but probably not a financial disaster.

The cure-all for buying extended warranties is maintaining a cash emergency fund. If you have a stash of cash, you can say no to all those warranties and just pay for repairs to your products, vehicles and home appliances.

But the counterargument is that few people maintain a repair fund, says Tim Meenan, executive director of the Service Contract Industry Council, an industry group representing warranty companies. “I’ve probably asked more people than anyone else … ‘Do you have a fund set aside to make repairs?’ ” he says. “I’m waiting for the first ‘yes.’ ”

Here’s a look at two common types of extended warranties:

PRODUCT EXTENDED WARRANTIES: These are offered most often on electronics, such as cellphones and cameras, and appliances, such as refrigerators and clothes washers.

An argument against extended warranties for products is that repairs may be covered, first by the retailer as a returned item, then by the manufacturer’s warranty.

Even the federal government issues a caution. “Some extended warranties duplicate warranty coverage that you get automatically from a manufacturer or seller, so this add-on may not be worth the cost,” says the 2014 Consumer Action Handbook, put out by the General Services Administration.

Consumer Reports’ data show products seldom break within the window of time that the warranty covers.

And often a repair doesn’t cost any more than the warranty. So buying a warranty is like paying for a repair whether you need it or not.

Meanwhile, the credit card you bought the item with might already extend the manufacturer’s warranty for free. It’s worth checking on what your card offers.

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