HSFPP Weekly Update #83—Extended Warranties: Are They Worth Buying?

Message from Flashman: Whenever you buy electronic equipment such as a CD player, TV, or computer, you usually are offered an extended warranty beyond the period of the manufacturer’s warranty, at an additional charge. The question to ask yourself is, “Is this worth it?” If the item breaks or stops working after the manufacturer’s warranty expires, will repairs cost more than the extended warranty? Will the item stop working at all (before you’re ready to replace or upgrade it, anyway)?

Think about the equipment that you’ve owned already: How long did you have it before it quit working? And can you expect the same sort of experiences in the future? As far as you can tell, is electronic equipment getting better or worse? And how long will you want to keep it, even if it does keep “going and going and going...”?

(A side argument: In the case of computer equipment, upgrades are necessary every few years. Can you expect this to continue, or have computer capabilities reached a temporary plateau, for your purposes, anyway? Some people seem to think they have, and others believe constant upgrading will continue. So, if you buy the very latest equipment, how long do you expect to keep it? And, after answering that question, do you think it will be worth buying an extended warranty?)

This fun website from Maryland Public Television will help students learn more about credit, budgeting, and how much being on their own will really cost, through interesting games and activities. (Grade range 8th - 12th). 8th grade teachers should find it excellent to use with Reality Store.

You might want to read Weekly Update # 7 for full details on the earlier story, “Extended Warranties Are a Form of Insurance...,” for additional resources on this topic. You might also consider sending resources such as these home to parents for their information and to show what is being covered in the classroom.

Have students answer the questions following the two news stories. By doing these exercises, students might also become familiar with Consumer Reports magazine and how it can help them make better buying decisions (for price and quality, as well as to compare features). If you have time, consider going over CR’s comparisons of various products with your students and invite discussion. Select an area of special interest to students, such as cars or stereo equipment. What features do students want or need? What turns them on or off about a product? Would Consumer Reports’ assessments influence their buying decisions, or would they prefer to buy what their friends are buying (or what advertisers persuade them to buy)?

“…Warranties—about $60 to $300 for three years’ coverage, depending on the product—are rarely a good investment. The main reason: Most big-ticket items are very dependable. For example, only 8 percent of analog camcorders, electric ranges, dishwashers, and top-freezer refrigerators were repaired in their first three years, according to 38,000 Consumers Reports readers surveyed in 2000.

“The odds are heavily stacked against your collecting on an extended warranty. In fact, the operating profit margins on such warranties are nearly 70 percent, vs. 10 percent on the products they cover, says Laura Champine, a consumer-products analyst at Morgan Keegan, a Memphis investment bank.” (The article does mention two exceptions in which it is a good idea to get an extended warranty – expensive treadmills and laptop computers.)

“Extended warranties are rarely worth the money spent on them. That's because, in most cases, if a product is defective, it will usually break down while the manufacturer's warranty is still in place. Retailers push extended warranties because they make
more profit on them than most of the products they sell.

“A study by the National Science Foundation found that you often pay more for the contract than you would for the repair that it covers. For some items, repairs are not particularly costly and, in many cases, products never need servicing. In fact, up
to 80% of all extended warranties are never used. Also, many extended warranties do not cover the entire product, only certain parts or specific repairs. Some do not cover labor.”

To answer the questions, use the article on page 11 of the October 2001 issue of Consumer Reports. It should be available in most school and/or public libraries.

1. Considering only the warranty cost and potential repair costs, would it be worth it to buy an extended warranty on a 30-36 inch TV? Give reasons.

2. Considering the percentage of 30-36 inch TVs that need repairs, would you still buy an extended warranty? Why or why not?

3. Have you ever bought an extended warranty for a product you purchased? Did you need to use it? Give examples.

4. Which items are more prone to need repairs? Why might lawn tractors and riding mowers have such high extended-warranty costs over the repair costs?

The purpose of this Web site is to assist county extension agents, credit union educators, and high school teachers in improving the economic well-being of our constituency, beginning with today’s students; and also, to assist teachers in Kentucky in meeting KERA’s goal that all students become technologically literate. Weekly Updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators.

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HSFPP Weekly Update #83—Extended Warranties: Are They Worth Buying?