Extended Warranties: How retailers profit on your vulnerability

Published in El Pais, January 9th 2018

Everyone in their lifetime has experienced this. You are at the electronic/appliance store and are lining up to make your purchase, you get to the cashier but before they rung up your purchase your asked if you want to buy the extended warranty. For cheaper items this can be an easy decision but when you are buying an expensive tv, phone or appliance this can be tricky. You are already spending a lot of money, so you don’t want to spend more but the thought of your expensive new device breaking and needing either to be replaced or repaired is worrying. As scary as that is, its better to roll the dice and walk away.

For some consumers the warranty causes peace of mind, but for the retailer it is often a cash cow. In 2015 it was reported that 80% of major electronics retailer Best Buy profit were from extended warranties. The simple reason is that most of the warranties expire before being used, and even if you approach a retailer with your claim, there are many details hidden in the fine print which gives them reason not to honour it. Often the warranties will exclude parts that are most likely to break down, most famously Comcast was sued for selling a warranty that had so many exceptions in the fine print that the warranty was deemed impossible to redeem.That does not mean that all extended warranties are bad and filled with loopholes to get out of paying, but even those are likely not worth your money. Many products automatically come with a one-year warranty with the manufacturer which often overlap with the extended warranty, so you are at least protected if your product breaks down shortly after purchase and even if it breaks down after the warranty expires the cost of repair can often compete with the original cost of the warranty, even without taking into consideration the time value of money.

For those that are prone to be risk averse you may not care and decide that the lack of worry is worth the price of the warranty but even that is no guarantee, especially when the company you bought the warranty from goes out of business. When this happens, the warranties become void and you are in the same boat as those who decided against the purchase from the beginning.

There are examples of consumers coming out ahead with warranties but for the most part you are better off saving your money, collectively it can add up and its better for it to be in your pocket than in theirs.