Are extended warranties... warranted?

TEXT OF STORY

TESS VIGELAND: Picture this: You're about to buy some high-tech gizmo, a little holiday treat for yourself. Suddenly, the salesperson says, 'Wait! You should buy an extended warranty.' You know, to supplement the standard one from the manufacturer. What to do? What to do?

We asked Marketplace's Nancy Marshall Genzer to find out whether extended warranties are warranted.


NANCY MARSHALL GENZER: I bought an extended warranty. Once. In the '90s. On a boombox. I got the pitch for the extra coverage at the cash register. It sounded a lot like this pitch at a Best Buy in the Maryland suburbs of Washington.

BEST BUY SALESWOMAN: Any kind of normal wear-and-tear, power surge, heat, dust, humidity stuff that happens when it snows and the power goes out...

I said yes, just like this customer did. I mean, what if the boombox broke before the manufacturer's warranty expired? So I ponied up an extra $25 for the extended coverage. And I never used it. That boombox is indestructible. It traveled with me to Budapest, Hungary, then Bosnia. This grizzled war veteran now resides in my sons' room, where it is tormented by toddlers. Yes, it still works. Perfectly.

Jack Gillis says my experience is typical. He's with the Consumer Federation of America.

JACK GILLIS: Extended warranties are really a bad deal. Think about it: You're paying a certain amount of money for something that probably won't happen.

Data from Consumer Reports shows that products don't usually break down during the time extended warranties cover -- the first two or three years. So, like me, most consumers who buy the extra coverage never use it. That makes these plans enormously profitable for retailers.

Joe Feldman is a retail analyst for the Telsey Advisory Group. He says extended warranties offset the deep discounts offered by big-box stores.

JOE FELDMAN: It makes up for some of the discount. It makes up for the cost to ship it. There's all the different expenses that are out there, sure.

So if extended warranties are such a great deal for retailers, and a bum deal for us, why do we keep buying them? We're responding to a basic instinct: the urge to avoid risk. Behavioral economists say risk aversion is as powerful a force as hunger. The instinct is strongest for big purchases.

Back at that Maryland Best Buy, Randy Morgan just bought a $40 extended warranty on a flat-screen TV.

RANDY MORGAN: Better peace of mind for $40. It's covered for two years if anything happens to it. Just bring it back in. I've used it once before.

Morgan bought an extended warranty on a TV that later wouldn't turn off. He says Best Buy came in and fixed it. He's happy to pay for that kind of security. But this new TV he's buying extra coverage on? It's not even for him. It's for his mother-in-law. He's making me look really bad here. And guess what? When I finally do buy something for my mother-in-law, I'll be extra tempted to get an extended warranty.

Economist Kevin McCabe heads the Center for the Study of Neuroeconomics at George Mason University. He says we're even more risk-averse when it comes to gifts.

KEVIN MCCABE: When we buy a present for somebody, often we want to demonstrate that we care with the present that we buy. And to some extent an extended warranty does say you care, right?

Nothing says I love you like an extended warranty. McCabe says, if you do want to buy one, do some research first. It might be worth the money if you're buying a product with a track record of breaking down. But resist the hard sell.

MCCABE: The service contract that's offered to you at the door often is not very competitive. It's an in-house product. There's no way for somebody to compare alternatives at that moment.

Retailers can charge whatever they want for the extended warranties. The government doesn't regulate these plans. McCabe says, look for alternatives. You can get extended warranties through some credit cards. Or tack a rider onto your homeowner's insurance.

In Washington, I'm Nancy Marshall Genzer for Marketplace Money.

About the author

Nancy Marshall-Genzer is a senior reporter for Marketplace based in Washington, D.C. covering daily news.

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