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Should You Buy an Extended Warranty?

Farnoosh Torabi

We've all been there. As we head to the register to buy a new laptop or cell phone, we face the aggressive sales pitch to buy an extended warranty. And many of us do spring for this additional service contract. In 2010, we bought 250 million extended warranties, according to the Service Contract Industry Council. But are they really worth it? It's a hot debate and the answer is: It depends. Though, in most cases, you're better off just saving that money.

First, a little background: Many products come equipped with warranties from their own manufacturers, in general, for up to one year—sometimes longer. If the product breaks down (and it wasn't your fault), you can usually send it back and get it fixed or replaced at no charge. Buying an extended warranty, meantime, will usually lengthen the manufacturer's warranty and sometimes offer additional features like home repair or help with accidental damage.

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But according to Consumer Reports, few products actually fall apart after their basic warranty period expires, and the cost of the extended warranty sometimes outweighs the expense of just fixing the item on your own. That's probably why warranties are such major windfalls for retailers. Profit margins are reportedly as high as 50 to 60 percent, which means only a few of us are getting our money's worth.

Take flat-screen TVs. You may be tempted to pay up for the extended warranty for "peace of mind," considering this is a big-ticket purchase, but a survey from thousands of TV buyers shows that LCDs and Plasmas have very low chances of needing repair in the first three years. The repair rate for the average Vizio LCD, for example, was just 3 percent. Consumer Reports also found similar stats for digital cameras. Merely 4 percent purchased between 2006 and 2010 had to be repaired.

In the household appliance category, few products break during their typical 3-year warranty period. For example, Consumer Reports found the only one in five gas ranges needs repair in the first three years. And if a breakdown occurs during the extended-warranty period, repairing the item is, on average, just a few more dollars ($150) than the warranty price ($142).

There are some exceptions. Repair experts say we may want to consider extended warranties for computers, laptops and tablets. Around 30 percent of PCs break by their fourth year and basic manufacturer warranties are becoming less generous. To really get your money's worth, make sure the warranty covers accidental damage and extended tech support.

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Cell phone insurance is also a bit of a toss-up. If you're clumsy or prone to losing things, it may come in handy. But, keep in mind, the service can cost up to $8 per month on top of a $25 to $100 deductible. Only 17 percent of buyers got a new phone because their old one broke and just 3 percent because the phone was lost or stolen.

Better advice? Hold onto your old cell phone after buying a new one. If you're still using the same carrier, you may be able to reactivate the old phone for free in case of an emergency and use it until you qualify for a cheaper—or even free—phone.

Finally, what about cars? A few years back Consumer Reports reviewed 8,000 car owners. The average extended warranty cost was about $1,000, but the benefit to owners was only $700. More than 40 percent never even had to use their extended warranty. Interestingly: The highest claims were for Mercedes-Benz vehicles, which have received below-average reliability ratings.

No matter what you decide, always read the fine print. Some extended warranties overlap the manufacturer's warranty and know that, despite some marketing claims, an extended warranty is not technically "insurance." It's simply a prepaid repair contract that can have limited coverage. Also note before you buy that your credit card company may double the standard warranty period at no extra charge.

Warranty prices are sometimes negotiable, too and discount third-party sites, such as SquareTrade.com, ElectronicWarranty.com and Safeware.com, offer extended warranties for as much as 50 percent less.

This article is part of a series related to being Financially Fit