The extended warranty breakdown

Picture this: It's Black Friday; you've just battled your way through nightmarish crowds at your local SuperMegaMart to snag a sleek, speedy new laptop at a bargain price. As you proudly present your find to the checkout clerk, you're hit with an unexpected question: "Would you like the extended warranty for this laptop?" You hesitate: do you? After all, you're about to drop a significant chunk of change on this machine, so doesn't it make sense to protect your investment?

Probably not, according to experts. The editors of ConsumerReports.org describe extended warranties as "notoriously bad deals," pointing out that they mostly go unused. Most products, after all, come with a manufacturer warranty that will cover repairs for anywhere from three months to a year. If a product hasn't broken within that period, it's unlikely to break within the next year or two after that. Moreover, even if your new laptop does malfunction beyond the included coverage period, the repair costs probably won't exceed what you would spend on the extended warranty itself. (The median price paid for an extended warranty on an electronic gadget is around $70, according to Consumer Reports.) And the service received under this warranty is less likely to be as satisfactory as repairs paid for out of your own pocket. The editors report that repairs done under warranty are more likely to take at least two weeks to complete and less likely to be done correctly on the first try.

In his Money Crashers column for U.S. News and World Report, David Bakke describes another reason that extended warranties tend to be a bad deal: the prices of most consumer gadgets drop over time. He gives the example of a Blu-ray player that costs $100. A two-year extended warranty could add $30 to the purchase price of the player--yet by the time that two years is up, the price of the player itself might have dropped to $30 or a little more, making the warranty essentially useless. Bakke also notes that extended warranties tend to be "rife with exclusions and fine print"--so even if the player breaks the very day your extended warranty kicks in, the damage still may not be covered.

Because of these problems, Bakke says he "cannot think of one instance where purchasing an extended warranty is a good idea." However, other experts think there are a few cases when an extended warranty might be worth the money. These special cases include: 

• Computers. Farnoosh Torabi, writing for Yahoo Finance, notes that "Around 30 percent of PCs break by their fourth year and basic manufacturer warranties are becoming less generous." An extended warranty may be particularly useful for a laptop, which is more likely to be stolen or dropped. However, it's important to check the fine print carefully to confirm that the warranty actually covers theft and accidental damage. The editors of ConsumerReports.org note that the benefits of extended tech support coverage for a Macintosh computer may justify the cost of extended tech support coverage. "While Apple has strong tech support," they note, "without a service contract its coverage is pretty skimpy."
• Cell phones. Torabi says extended coverage for your cell phone may be worthwhile if you're "clumsy or prone to losing things." However, Torabi points out that this won't apply to most people: only one in five cell phone users ends up replacing a phone due to loss or damage. A better form of insurance for most is to keep your old cell phone when you upgrade to a new one with the same carrier. That way, if your new phone is lost or damaged, you may be able to reactivate the old one at no charge.
• Any product with a poor repair record. The editors of ConsumerReports.org say that if you're choosing "a repair-prone brand," it may be worth extending your warranty. However, this is only worthwhile if repairs tend to be costly and the warranty itself is not. It's also important to make sure that the warranty coverage is comprehensive.

Products for which you definitely don't need the extended warranty include cars, appliances and most electronics. According to ConsumerReports.org, these products almost never break during the coverage window. Moreover, many extended-service warranties on new vehicles contain so many exclusions that they're virtually worthless.

If you think you'll lose sleep without extended coverage, it might be possible to get a safety net without paying for it. First, check to see whether your credit card will provide automatic purchase protection. Many cards, especially gold and platinum ones, will extend the manufacturer's warranty from one year to two, which Bakke says should be "more than enough coverage" for most products. You can also shop around to see if retailers will throw in a complimentary extended warranty with your purchase. Costco, for instance, offers a free two-year warranty on all computers and televisions, according to ConsumerReports.org.

Should you decide to purchase an extended warranty, make sure you're actually getting what you've paid for. Read the fine print carefully to see how long your coverage lasts and what its limitations are. (Note that an extended warranty usually overlaps with the manufacturer's warranty, so a "three-year warranty" may give you only two years of additional coverage.) If you're covering something large, like a TV or a major appliance, find out whether the warranty includes in-home repair or pickup. Also, see whether the product will be reinstalled for you when the repairs are complete.

When you've determined what the warranty covers, consider the price tag. The editors at Consumer Reports advise against buying any warranty that costs more than 20 percent of the product's original purchase price. Bakke thinks even that's too much to pay. Instead, he suggests skipping the warranty and setting aside the sum you would have paid for it in a bank account. That way, if you do need a repair, you'll have the money to pay for it. And if you don't, well, you'll have a little extra to put toward your next new toy.