What is an Extended Warranty?

Just as you’re preparing to get out your checkbook for that new car, appliance or computer, the salesperson may stall you for a moment by offering you an extended warranty. This term “extended warranty” often leaves consumers wondering just what they’re getting if they purchase one. The fact is that what an extended warranty offers can vary considerably. It’s important to carefully consider whether the extended warranty is worth the extra money.

So what exactly is an extended warranty? Generally, an extended warranty covers repairs, and sometimes service on the item you are purchasing, past the date of any basic warranty offered with the purchase. This is sometimes also called a service contract. Price on extended warranties, especially for appliances varies between 10-30% of the purchase price. Reading the details about what is covered may help you decide if you can afford one, or actually need it. Some extended warranties may not cover enough to really make them worthwhile, while others that offer free replacement of broken items can be worth the extra money.

First bear in mind that when you purchase something new, it should last for a good long time. A new refrigerator should not break down in the first year of use, and a new computer should run without problems. Most retailers and manufacturers bank on a new item working for at least a year or two without problems. This is why most manufacturers offer a six to twelve month basic warranty with purchase. It also may be possible to get a replacement for a broken item not covered by warranty if it breaks soon after you purchase it.

Exceptions exist with companies like Apple Computers. Apple may only guarantee a purchase for a couple of months. You may need to purchase a service contract, called Apple Care, so you can get even verbal assistance for problems with your computer without paying for this assistance.

On new cars, extended warranties are less common, since many cars now come with lengthy service contracts. Even on slightly used cars, the original service contract on the car may still apply, but it's important to check whether transferring ownership on the car voids the warranty. In these cases, it might make sense to purchase an extended warranty, since it’s hard to know whether the car will have trouble down the line. For household appliances or computers, purchasing an extended warranty is often a matter of choice.

With all major purchases, you can pretty well expect that you will have to service your purchase from time to time. This could include routine maintenance. In cars this means things like oil changes and tune-ups. It’s possible that an extended warranty will include extra years of service, but weigh the cost against what it would actually cost you to service the car. If you find you’d pay less for service than for the warranty, the extended warranty may not be a good deal.

In all cases, it’s important to read the fine print of an extended warranty before paying money for one. These can be very complicated documents with many exceptions that void the warranty. Don’t rely on a salesperson’s description of the warranty, and although it takes time, actually read it through, and pay close attention to any “exclusions” sections.

Also recall that the salesperson is usually motivated to sell an extended warranty, and tends to get a commission for doing so. It’s ironic how quickly the salesperson’s praise of your purchase changes to fear and doubt about how long your purchase will last. The extended warranty sales technique is an appeal to fear in many cases. The salesperson wants you to doubt the reliability of what you just purchased so you will fork over the extra cash.

It can also help to research items you want to purchase carefully through magazines like Consumer Reports. Clearly, it’s a lot easier to purchase something that is rated high for durability and few mechanical problems than it is to wait for someone to repair or replace the item you want. If you are choosing the most “durable” product, purchasing an extended warranty may be unnecessary, since the odds of it breaking, according to your research may be relatively slim.