Consumers fork out $16 billion for extended warranties

by Center for Personal Finance editors

YONKERS (7/17/06)--Go shopping for appliances or electronics and it's likely you'll be hit with hardball sales tactics for an extended warranty. They're lucrative for the retailer, but they're notoriously bad deals for the consumer (Consumer Reports August 2006).

How lucrative are they? Consumers spent $16 billion last year on these cash cows. The store may make $10 on a $400 digital camera, but it makes $50 for selling a $100 extended warranty.

Stores can make 50% to 80% profit on what they charge for extended warranties, even though most products seldom break in the first three years--the typical extended warranty window.

Consumers Union notes one exception: Extended warranties are recommended for treadmills, which can carry hefty price tags for house calls and repair.

Watch for these come-ons:

"You'll be sorry if you don't buy the extended warranty."

"Regular warranties are getting shorter." (True, but failure rates are low.)

"These break all the time."

"I can't vouch for imports."

If you're wondering whether an extended warranty is warranted, here's a reality check on some products:

Room air conditioner: These have become inexpensive commodities, so the replacement cost is low, and all major brands have low repair rates. For the price of an extended warranty, you may be able to buy another one.

Gas range: The odds of this appliance breaking within the first three years is only 19%. A Consumers Union survey revealed that the average extended warranty ($108) was almost as expensive as the average repair cost ($150), yet gas ranges require minimal maintenance.

Side-by-side refrigerator: Again, the cost of the average repair ($150) was very close to the cost of the warranty, and the product failure rate within three years may range from 8% to 28%.

Dishwasher: The repair rate for 3-year-old dishwashers is only 13%, according to a Consumers Union survey.

The Federal Citizen Information Center (Consumeraction.gov) recommends you ask several questions before agreeing to purchase an extended warranty: Who backs the service? How are claims handled? What happens if the dealer goes out of business? Are there situations when coverage could be denied?

For more information, read "Take a Hard Look at Extended Warranties" in the Home & Family Finance Resource Center autos section.