When Warranties Are a Waste

When to Buy Extended WarrantyThere's something reassuring about buying a warranty. Paying that little extra for peace of mind ensures that, whether or not you ever use it, you know that your phone, computer, refrigerator or microwave is completely safe from breakage -- and your wallet is safe from paying for the high cost of a replacement.

But what if your wonderful warranty is nothing more than a drain on your wallet? In many cases, warranties cover repairs that are unlikely to happen, duplicate coverage that you already have, or charge you too much for the service that they provide. By answering a few simple questions, you can determine if your warranty is a great deal or a huge waste of money.

Is it Likely to Break?

For manufacturers and retailers, warranties are a pretty good deal -- as long as they don't actually have to replace your item. Consequently, most warranties only last for three to five years, when you are least likely to need them.

With that in mind, you probably want to think seriously about whether or not a particular item is likely to break in the first three years of use. This doesn't have to be guesswork: a recent study by Consumer Reports showed that, while most items will outlast the three-year warranty window, some are far more likely to break than others. In fact, five items -- desktop PCs, laptop PCs, riding lawnmowers, self-propelled lawnmowers, and side-by-side refrigerators -- have a greater than 25% chance of breaking in the first three years of ownership. If you're buying one of these five items, you should probably give some serious thought to buying a warranty.

Does Your Warranty Cost More Than a Replacement?

Another issue is whether the cost of replacement is high enough to justify the cost of paying for a warranty. In the case of cell phones, one of the most popular items to buy a warranty for, this is particularly questionable. According to a recent study by J.D. Power and Associates, the average person keeps his or her phone for 20.5 months. Most cell phone warranties cost between $5 and $8 per month, which means that, over the life of a phone, the average user will pay $100 to $160 for protection. Factor in deductibles for replacement, and the cost of that warranty can go as high as $290.

Admittedly, $290 for a new phone could be a pretty good deal. However, given that most carriers offer steep discounts on new phones -- and will sometimes even give them away free for new or renewed contracts -- that $290 for a phone that is probably outdated doesn't seem like much of a bargain.

Are You Paying for Double Coverage?

Many products come with a manufacturer's warranty, which will guarantee replacement if the item breaks due to flaws. Additionally, if you have homeowner's or renter's insurance, there is a good chance that many of your possessions may be covered. If an item is covered by your insurance or a manufacturer's warranty, you might want to think twice about paying for a warranty, as you will be duplicating coverage.

While warranties can certainly come in handy if your computer or phone breaks, you should crunch the numbers before signing on the dotted line. After all, double coverage, insuring a product that is unlikely to break, or overpaying for a warranty only guarantees one thing: that you will be wasting money that you don't need to pay for a service that you are unlikely to use.
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