Extended Warranties. Are They Worth It?

January 14, 2010

So, what exactly is an extended warranty? It is a warranty on a portion or all of a product that starts when the original manufacturer’s warranty expires. It, as in the original, has a term, usually stated in months. Additionally there may be other qualifying components such as a maximum mileage or operating hours. Like the original warranty, it covers repairs or replacements of items that fail, but excludes normal wear, abuse or failure due to lack of maintenance.

Extended warranties are offered now on many consumer purchases on vehicles worth hundreds of thousands of dollars to a seven dollar electronic accessory. There are manufacturer, dealer and independent extended warranties available. These additional warranties, however, come with a price. Is this extra cost worth it?

Well, of course there is no simple answer to this. While there are many variables, even the same item may support such a need for one person’s application, but not for another’s. However, making the right choice requires more than just knowing the cost. You have to know what the service contract includes in full detail.

First, who is the company that is offering this? Generally they would fall into one of the three categories below.

Manufacturer: While this is probably the best warranty package, it is generally the most expensive. Service is usually throughout the country using their dealer network.

Dealer: Normally more price competitive, but may be limited to a single point of service. You must also feel comfortable with their level of service and their reputation. Additional risk may be the exposure of the dealer becoming insolvent and shutting down.

Independent: Most of these warranty offerings are by a company that may only sell such contracts. Repairs are carried out by qualified repair shops and paid by them. This can provide nation-wide service.

Now, before writing a check for this, let’s look at more. Is there a deductible, is road service included, where can it be repaired, what are their replacement part policies, can the warranty be purchased later, are there other price options, etc. If this is for an RV it is pretty pricey. Don’t make a quick decision. You need all the information to properly understand what you are getting and to make a qualified decision.

So, what is the take rate on these extended warranties? Well the only good measure can be seen in the automotive industry. Roughly 30% of buyers of new automobiles elect to purchase these service contracts, and that number is up from previous years. I would think the RV industry would be somewhat higher than that, but, due to the number of independent service policy companies, that figure is difficult to calculate.

Keep in mind, these extended warranty policies are a money making business for those selling them. Therefore, for the average buyer, they more than likely will not be cost affective. This is not to say that you will not be one of the few that such contracts have saved them tenfold. Essentially it is a risk whether you buy or not. If you buy an extended warranty, you only win if repairs are required, at or above the cost of the contract. If you don’t purchase the warranty you only win if your repairs are below that of the contract cost. In general, the odds are in your favor to not purchase such a guarantee.

Of course there is the peace of mind that having an extended warranty may bring. It’s really like insurance. We all pay it, and hope we never need it. But, that still does not make it cost affective. It’s a decision each must make for themselves, for their application and risk tolerance.

Next week we will look at the pit falls of warranties.

Rolling The Dice on Warranty Service – Lug_Nut – Peter Mercer