First, let me start off by saying that I’m the worst personal finance role model after purchasing my second television in the last two years. What can I say? We recently moved into a new house and unfortunately there is a bit of lifestyle inflation that comes along with the bigger place.
For years I avoided the temptation to buy a big flat screen television, until I was finally seduced by a 50 inch, 1080p plasma HDTV. It was rated one of the top TV’s in the market by Consumer Reports, so when I saw it on sale for $749 at a local electronics store I jumped at the chance to buy it.
The Extended Warranty Pitch
My last experience buying living room furniture and a television led to a major frustration over how retail stores aggressively push their extended warranties. I got the hard sell from both the sales person and his manager, and after turning them down I received two phone calls several months later from the retail financing division trying to convince me that it wasn’t too late to buy the extended warranty before the manufacturer’s warranty expired.
Whenever I go shopping, especially at a furniture or electronics store, I am prepared for the extended warranty pitch and won’t fall for their clever sales tactics.
This time I negotiated the price of the TV along with delivery, wall mount bracket and installation for an additional $200 (regular $350). Before the salesman wrote up the order he went over the extended warranty and explained that these days it will cost more to repair a television than to buy a new one. The extended warranty would cost $279 for an additional 4 years after the 1-year manufacturer’s warranty expired.
When I declined his offer, he went on to explain how if I didn’t end up using the extended warranty I would receive store credit for the same amount. Sounds like a good deal, right? Except the retail store still wins, since I would be forced to go and buy another product with the store credit and could potentially spend even more money. Not to mention the fact that I would probably forget all about the warranty and the store credit after 5 years.
Peace of Mind at a High Price
A lot of money has been made by retailers’ offering peace of mind to consumers at a high price. Financial institutions offer 5-year fixed rate mortgages, even though a variable rate saves homeowners money nearly 8 times out of 10. Because they’re selling “peace of mind” on the fear that interest rates will rise, the majority of homeowners pay a premium by taking the 5-year fixed rate mortgage.
For an extended warranty to make sense for consumers, the product will need to break between the time the manufacturer’s warranty expires and the extended warranty runs out. Most products will fail within the first 30 to 90 days, while still covered by the manufacturer’s warranty.
The probability of your product failing at all is extremely unlikely for today’s electronics and appliances. According to Consumer Reports, an LCD or Plasma television has a 3 percent chance of needing repairs in the first 3 years. Those are pretty good odds.
The cost to repair your broken product would have to be greater than what you paid for the extended warranty, and in most cases the cost is the same or less than the cost of the warranty.
Self Insure Your Purchase
Rather than the retailer profiting by selling you an extended warranty on your appliance, electronics or furniture, a smart move would be to set aside the cost of the extended warranty in your high interest savings account. The money will be there if you need to make a repair and if you don’t need it then at least you’re the one profiting, not the retailer.
Just make sure you save the money after a few years and don’t turn around and spend it on another TV like I did.