In my article the other day about the deal I got on a new computer despite my immediate need, I neglected to mention something important: I refused the extended warranty that the salesperson offered numerous times. Any extended warranty is almost always a bad deal.
When I was a teenager, I had a short-lived job at a ubiquitous electronics store; let’s call it “Transistor Hut.” This was the only job in retail I ever had, and I can’t say I was a fan. Our bonuses were determined by our success in selling the “TSP,” an extended warranty. Let’s say that stands for the “Candy Service Plan (with a T),” and I don’t know whether this is still in existence.
The price of the TSP depended on the price of the item, and TSPs were available for almost every product. If you buy a $19.99 pair of headphones, you could spend another $9.99 for unlimited replacement, no questions asked (other than your phone number). If you buy a $299.99 DVD player, $79.99 (or so, keep in mind this was fifteen years ago) would allow you to bring the broken device into the store, have them ship it to a repair facility, and fix or replace it. That’s a process that would likely take several weeks.
The TSPs and any other store’s extended warranties are pushed hard by salespeople because they are often rewarded for them, and they are rewarded because they are very profitable for the store. Most people who buy the warranty will not use it, so the funds become significant income for the company.
Most credit card companies automatically double the manufacturer’s warranty on products purchased with the card for up to one additional year, so that automatic, free protection is often more than enough. Check your credit card’s terms to see if this is available to you. I knew it was available to me on my American Express Blue Cash for Business Card when I purchased the new desktop computer for Consumerism Commentary’s multimedia production.
Perhaps a smarter way to deal with the possibility of broken items — besides not buying anything — is to self-insure. Rather than spending an extra $50, $300, or $2,000 for an extended warranty depending on the product, put that amount into a new savings account designated for your own personal warranty extension. Do the same for all the products you buy for which a salesperson attempts to sell you the extended warranty. What you have created is a pooled funding source for repairs. It is unlikely that all of your products will break or stop functioning, so you can withdraw from this fund to pay for repairs for the one item that fails.
With this strategy, you keep all your money if nothing goes wrong, and if the money is sitting in a high-yield savings account, it’s working for you rather than lining the pockets of major retail chains.
Here is the step-by-step process.
Step 1. When you purchase an item, make note of the cost of the extended warranty. Don’t buy it.
Step 2. Transfer this amount to a special savings account that you will not touch until one of your “protected” items needs to be repaired. ING Direct lets you create sub-accounts, one of which you can name “My Extended Warranties” or “Warranty Fund.” Don’t create a sub-account for each item. One for all of your items will do. Thus, the “Warranty Fund” is pooled.
Step 3. Repeat steps 1 and 2 using the same Warranty Fund you already created for all products you buy that might break or are associated with an extended warranty. This will build up a sizable Warranty Fund in your own name at your own bank earning interest for you.
Step 4. When one of your self-insured products breaks or otherwise needs repairs, dip into your Warranty Fund. Try to avoid using your Emergency Fund unless the Warranty Fund doesn’t cover the full expense and the product must be fixed or replaced.
The strength here is that you are pooling your own funds. This is what the retailers do to ensure warranties bring significant profits to the company. Just like not every customer will take advantage of their purchased extended warranty, not every product you self-insure will break unless you are extremely unlucky or extremely careless. In addition, the best benefit of self-insuring is that you will never have to argue with a store representative about whether certain type of damage is “covered.”
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{ 13 comments… read them below or add one }
I think the best service plan on electronics is to do your research, buy a good model, and take care of your stuff. I’ve never had any electronics items that were lemons. But I always researched my purchases – I wanted to make sure I was getting the product that best suited me and I wanted to make sure it was a quality, reliable item. Then I took care of it – cleaning and dusting regularly and keeping it away from pet hair and excessive temperatures. I’ve never had anything break that wasn’t due to time (after 5 years anything can break) or my fault (I dropped a DVD player). If something is so expensive I have to take out a warranty (think insurance policy) I probably don’t need it right now.
Ha! I know where you worked since I only know of one store that sold “TSPs” ;)
The “Transistor Hut” didn’t give it away? :-)
I wouldn’t create an account just for self-insuring, it would be fine if you just paid to fix or replace broken things out of “general revenue”. The more important thing is deciding if the extended warranty is worth it for you.
I don’t buy expensive TV’s or stereos. My TV was $400 and I’ll take care of it, so on the off chance that it breaks I can afford to replace it. When it breaks I can take the opportunity to buy a better TV because the equivalent $400 TV will be much better by then.
Same thing with desktop computers. I am good at fixing computers so if something gets fried I can replace the individual component for a good price without much effort.
Laptops, on the other hand, you usually have to replace big expensive pieces when they break like the screen or motherboard. Laptops are also harder to take care of. They are lugged around in a backpack or briefcase, could be dropped, are more likely to get something spilled on them, have an expensive battery that wears out, have power cords that are often used and can break, etc. In this case there is a good chance that I’ll need a repair within a couple or three years and that the price will be close to the price of a new laptop (like say more than 50%). Therefore if I can get an all-inclusive service plan for 20% of the price of the laptop then that’s worth it to me.
Usually I don’t like the sales tactics. The salespeople pretty much say “This thing is going to break so you should get the plan.” Pretty lame sales job. If there is no chance that the thing will last then why do I buy it in the first place? Why don’t they just sell it for cheaper and say it will only last one year?
I’ve never bought a warranty on anything I own and thankfully the need for one has never come up. At this point I’m so far ahead of the game, that I can’t justify the cost of a warranty for anything. For the few times when items needed repair, I was able to either do the work myself or have the item repaired for less than the cost of the warranty in the first place.
I never had and never will buy an extended warrenty. 2 reason:
1) I have heard to many “fraud stories” regarding extended warranty.
2) Even with all the fraud the stores make a LOT of profit on extended warranties.
Thus, extended warranties are clearly not a good deal.
Additionally, the price of electronic items is constantly DECREASING, thus, you are buying a warranty based upon what you PAID but if your product breaks during the extended warranty period, the same product will be much less than what you originally paid. Thus, the cost to replace will probably not be much higher than the warranty amount and most likely, the product will not break.
Always self insure unless the cost of not insuring is very high. For example, get a high deductible on you car. Were I used to live (moved) the savings by going from a $500 deductible to a $1,000 deductible was over $200!!!!!!
While I’ve purchased extended warranties for my desktops years (over 10, probably) ago and no longer do, I know some people will still want some sort of that protection. For them I suggest SquareTrade, which supposedly offers warranties at significant savings. I’ve never dealt with them so your experience may vary, but the website seems straightforward.
Like someone else mentioned, I’m not sure that I would create an entirely separate account for this purpose, but I think it’s been mentioned here before that ING’s sub-accounts are fairly easy to create.
(Hope this isn’t considered spam.)
I lioke to think of this store as the electronics equivalent of Toys “R” Us. With the R in a circle rather than quotes.
Quite right, Terry, though when I was there, it was before the Circle-R.
I had no idea credit cards would extend a computer’s warranty. Great post!
It’s crazy that you just wrote about this… I JUST created my own Extended Warranty Fund via our ING Direct account too.
I showed it to my wife & explained the concept to her & she was like, “Hmmm, that makes a ton of sense. Why doesn’t everybody do that?” And I was like… exactly! :-)
Good stuff!
Most likely your light isn’t on because of a “glitch.” The vehicle monitoring system is extremely reliable and stable. Before your vehicle’s Engine Control Module (ECM a.k.a. primary computer) triggers the light, it monitors the suspect circuit for a set number of vehicle starts and stops to protect against false alarms.
Extended warranties are just fine for expensive items from reputable companies that are likely to be broken. High end laptops come to mind here, but this is the rare exception.