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Ask Stacy: Are extended warranties worth it?

Should you buy a service contract or extended warranty? My answer has always been no. These days, however, I'm less sure. Here's why.

By MSN Money Partner Jun 24, 2014 1:02PM

This post comes from Stacy Johnson at partner site Money Talks News.

Money Talks News on MSN MoneyOver the 20-plus years I’ve been doing consumer news, I've done several stories about extended warranties and service contracts. They've mostly been negative.

Damaged laptop © Jason Stang, Photo LibraryMy opinion has always been these add-ons are merely profit centers for retailers and rarely worth the money.

Recently, however, I began questioning that advice, not because the service contracts are better, but because some products they protect are getting worse.

Here's a look at this week's reader question.

Are extended service plans for washing machines and dryers worth the investment? We bought a new Maytag electric dryer six months ago, and now we are receiving mailings about buying a service plan to "protect our investment." -- Kathy

Are service plans worth it?

We've all been there: You're at the checkout buying anything from a cellphone to a dishwasher, and the salesperson launches into a new pitch. "Don't you want an extended warranty/service plan to protect you from expensive repairs?"

There's a reason these pitches are so intense. These post-sale policies come with markups of 50 percent or more, typically a much higher profit margin than the retailer makes from the product itself. That profit margin alone should tell you something -- namely, lots more money is being taken in than is being paid out for repairs.

Other reasons to just say no:

  • You may be getting duplicate coverage. Most products come with a manufacturer's warranty. You may be paying twice for the same coverage.
  • Products don't break during the warranty period. Everything's going to break eventually, but according to reliable sources like Consumer Reports, it's more often when the product is outside the time frame covered by the service plan.
  • Repairs might be cheaper than the service plan. If fixing the problem is less than the cost of the service plan, even when you "win" by having the plan, you still lose money.
  • You might have coverage elsewhere. Pay for your purchase with some credit cards and you’ll get a free, automatic extension of the manufacturer's warranty. Did you check before you bought?

They don't make 'em like they used to

My parents bought a GE refrigerator in 1973. If memory serves, they kept that refrigerator for at least 25 years, and it needed few, if any, repairs.

I bought a GE refrigerator in 2006. I've had a repairman out here twice, and I've replaced the ice maker twice myself.

Why the difference? In a word, computers. Air conditioners, washers and dryers, and refrigerators are all examples of appliances that used to be all mechanical, but now contain circuit boards.

Delicate electronics + moisture + heat = repairs

This isn't just my theory. I talked to both an appliance and an air-conditioning repair guy, both with 25-plus years of experience, and both independently said the same thing: They really don't make them like they used to. Both cited cheap, Chinese manufacturing and electronic components as primary reasons.

Coincidentally, both said the products they respectively service, refrigerators and air conditioners, used to last decades and now last about five years before needing repair.

So, should you spring for protection?

Despite the fact that some of today's products aren’t as good as yesterday's, in most cases you still shouldn't pay for extended protection for the reasons cited above.

Like most things in life, however, it's not black and white. Additional things to consider:

The product. Some products fail more often than others. Consumer Reports does an annual survey and offers repair rates (subscription required) reported by consumers on everything from appliances to electronics. The differences among brands and types can be dramatic. For example, 31 percent of those surveyed with side-by-side refrigerators (like mine) said they needed repairs, while only 11 percent of those with top freezers (like my parents') did.

As for electric clothes dryers, the subject of this week's question, the Consumer Reports survey found that LG was the most reliable brand. Overall, about 12 percent were reported as needing repair.

The more likely a product is to fail, the more valuable the extended service plan. However, a plan covering something more likely to break will probably cost more as well. So the best idea is to do this type of research before shopping and avoid products with higher failure rates.

Who's using it and how. Giving a computer to a 5-year-old, or someone who acts like one, is much riskier than giving one to someone responsible. A computer that sits on your desk is less likely to need repairs than a tablet you take to the beach.

The cost. Don't even think of buying an extended service contract or warranty without researching prices beforehand. If you have the right credit card, you might get additional protection free. You might also find it cheaper from another retailer. And if you're getting the hard sell months after the purchase, like the reader who sent in this week's question, be especially careful.

The details. You need to read the fine print to see what's covered and what isn't. Do you have to pay to send it off for repairs? Are you paying for coverage that overlaps with the manufacturer's warranty? Does your homeowners coverage offer some of the same protections? Does the company have a spotty record when it comes to paying claims? What happens if the warranty company goes belly up?

In short, never impulsively buy this type of protection at the point of purchase, or thereafter. Understand what you're buying before you buy it.

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