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Extended warranty trap

MP3 players for sale at a Best Buy store

TEXT OF INTERVIEW

SCOTT JAGOW: 'Tis the season for getting asked whether you'd like to get the extended warranty on that new iPod or TV or computer you're buying. With profits margins very thin, retailers are gonna try to sell you their longer-term warranty. But Consumer Reports just crunched the numbers and editor Todd Marks says your answer should be no.

TODD MARKS: First you're betting that the product's going to break in the first place. That's unlikely. We have frequency-of-repair data from tens of thousands of readers that talk about basically what you can expect to go wrong with a product within the first three or four years of ownership. And in the vast majority of cases the repair rate is well below 50 percent. Many products, the repair rate is under 10 percent. There's another part of the equation to think about too and that is what is, what will be the cost of the repair relative to the cost of the warranty? We found out that when a product breaks and people have an extended warranty and go out to get that product repaired under the extended warranty, that the cost of the warranty and the cost of the repair were very, very similar.

JAGOW: So you're telling me if I buy a $3,000 laptop or a TV, I should just forego the $200 or $300 warranty altogether?

MARKS: Well, you can spend it for peace of mind, you know, that's what the warranty business is all about. It's expensive insurance and they're selling you peace of mind. What is insurance supposed to protect you from? Well when you're thinking about insurance at its most basic — home, health, life — what we're dealing with is insurance that is designed to protect you from catastrophic financial losses that you can't easily cover out-of-pocket. With an extended warranty for products, that's just not the case. Most people can cover the cost of these product failures.

JAGOW: Are there any other options for getting some kind of protection besides the extended warranty that the store is offering?

MARKS: Well the most basic is to use your credit card to purchase any product you buy. And I shouldn't say all credit cards, it's mostly gold and platinum cards, but most credit cards actually give you extra coverage or they extend the manufacturer's warranty for up to a year. So that's one tip. Two: We always advise people, if you are going to get an extended warranty, do not pay more than 20 percent of the product's replacement cost for that warranty. That's just too high.

JAGOW: Well I gotta tell you Todd, you know, when you're standing there buying this expensive product, the sales people somehow make the extended warranty sound really, really appealing but this Christmas I'm gonna tell them you said no.

MARKS: well that would be a good gift to give somebody and maybe the money that they save they can put towards gifts for you.

JAGOW: Alright thanks a lot.

MARKS: Alright, my pleasure.

JAGOW: Todd Marks from Consumer Reports. In Los Angeles, I'm Scott Jagow. Thanks for joining us and have a great day.

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