Extended Warranties are for Suckers
You would think this is pretty obvious yet people keep throwing their money into these things.
Someone’s done the math and my hunch was right. A New York Times article titled The Word on Warranties: Don’t Bother expains why:
- They’re actually a profit center for retailers. The margins on electronics are very thin, but they extended warranty margins are as high as 80%.
- It’s a sucker’s bet: you’re betting against the bathtub curve and you’re also betting against the trend of falling prices in the belief that the cost of repair will exceed the cost of replacement.
- A Consumer Reports study shows that only 10% of digital cameras fail in their first five years. For the extended warranty to be valuable, it would have to be less than 10% of the purchase price, yet extended warranties often cost as much as 20% of the item’s price. Besides, if you had a five-year old digital camera, you’d probably want to replace it, not repair it.
- Last year, suckers spent $16 billion on extended warranties.
