Updated on 02.01.12

Don’t Buy a Service Contract or an Extended Warranty (31/365)

Trent Hamm

I don’t like high pressure sales situations.

Whenever I find myself in a situation where some cheesy salesperson is trying to give me the hard sell on some product, I find myself walking away. Even more so, I usually find myself getting a negative gut impression of the product being sold, one that’s usually reinforced when I go home and do the research only to find that the product is overpriced or underwhelming.

Case in point: when Sarah and I bought our Prius in 2009, most of the people at the dealership were friendly and hands-off, but there was this one guy who we interacted with that tried to do the hard sell on a service contract.

We were ushered into a small conference room by him where he attempted to do some kind of hard sell on us on a service agreement. It came off like one of those police interrogations on television.

After about a minute, we told him we weren’t interested. I got up to leave and he said, “Now, just hold on a minute…”

I told him, flat out, that I was walking out that door and if I was stopped from doing so, we were leaving the dealership without the car.

That’s how I often react to the hard sell. I just walk out of the room. I don’t trust the “hard sell” and I’m certainly not going to listen to it. If your product is so questionable that you have to resort to the “hard sell,” I’m not interested.

Don't Buy a Service Contract or an Extended Warranty (31/365)

Of course, a big part of the reason I walked out is because, most of the time, that initial offer for a service contract or an extended warranty is way overpriced and does little for you. It’s a questionable product, which is part of the reason why they went for the “hard sell.”

For example, if you’re looking for a service agreement for your car, you’re going to want to make sure that the contract you’re being offered does not merely duplicate things that are already found in the warranty. You’re also going to want to carefully read over the exclusions, because things like “normal wear and tear” make the service contract nearly worthless (as they’ll claim almost everything is “normal wear and tear” and thus excluded from the contract). These two factors alone will eliminate most service contracts you could buy.

If you’re still interested in finding one, shop around. Check with various auto repair shops in your area and ask if they offer service contracts. If they do, ask for a copy and review it carefully. The vast majority of contracts that you find will have exclusions and restrictions that make them a pretty poor value.

What about an extended warranty? These usually just extend the terms of your car’s warranty. However, they’re not a particularly good deal, either, because most of the defects in a car show up before the end of the normal warranty and the warranty often excludes things like “normal wear and tear” (just like that service contract). It’s much like buying an extremely overpriced and very limited insurance policy for service on your car.

In my opinion, your best move is to take the money you would have spent on these things and put it into a savings account. Then, tap that money only when you actually need repairs to the car (repairs that the service contract wouldn’t have covered anyway).

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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  1. Vicky says:

    I once bought a digital camera at Comp USA. I was asked to buy a warranty. It was $20, good for 3 years. I asked specifically – if I drop the camera and break it, will it be covered? Yes, yes it was. So I bough it.

    Wouldn’t you know, within 2 years I dropped it on a concrete stairwell and broke it. Really upset, I remembered that warranty. Though I had moved from Texas to Florida, the Comp USA here still honored it… and replaced my broken camera.

    I’d say it was worth the $20. I’m so clutzy, that with little things like that that are expensive, it’s worth it.

  2. jim says:

    In general extended warranties are a bad purchase and not worth the money.

    Do they occasionally pay off? Sure. But the vast majority of the time you’re just wasting your money.

  3. Meg says:

    The only service contract we bought on equipment was for the laptop my son took to college. If he weren’t a careful person who wouldn’t have complications from damage he caused himself, we might not have done this. 2 1/2 years in – three repairs, then a free replacement. But you have to be able to bring or ship it back, check immediately when something goes wrong, and keep track of the dates.
    I agree about service contracts on anything else.

  4. Des says:

    Its just like any form of insurance. Is it statistically likely to pay off for you? No. If it were, the company providing the insurance would go out of business. The only time you need any form of insurance is if paying for the unlikely event would ruin you (or, I suppose, if you know something about your own lifestyle or habits that the company doesn’t, but that could toe the line of fraud). My car is only worth a few thousand dollars, so I don’t carry comprehensive insurance. If it were totaled, it would be a hassle but I could afford to replace it. If I drove a $30k vehicle, the scenario would be different. Likewise, I carry life insurance to replace my income. If I were independently wealthy, I would cancel the policy. If replacing a $1,000 laptop would break you, then you are a good candidate for a warranty. Since that is not true for most people, most people are better off opting out of it.

  5. Jamie says:

    I bought a Prius a few years ago, and to be responsible, I bought the most expensive warranty available.

    My Prius broke down within a year and has not run now in two years. It is a very expensive storage unit sitting in our driveway until it gets paid off.

    The warranty covered nothing significant.

  6. Kyle says:

    #4 Des has it right. Insurance is always a bad bet. Insurance is for reducing risk, not for saving money.

  7. marty says:

    When I bought my son a laptop from Dell, I made sure I ticked the “Full Cover” (or whatever it was called) warranty that covered everything. Which was good, given he managed to soak it with soft drink twice, lost keys from the keyboard, had a video card fail.
    When I bought my daughter a laptop from a store, I didn’t get a full cover warranty. Somehow the display got cracked (with lcd leakage all over it) within a week… (not that it mattered, because even the full cover warranty did not cover display breakage!)

  8. Scotty says:

    As someone who used to work at a major electronics chain, I’d offer up some advice:

    1. Extended warranties, as Trent says, are usually not worth it (not “always”, but usually). Extended warranties are basically an insurance policy – you trade money for peace of mind, plain and simple.

    2. Read the fine print. Salespeople are often pressured extremely hard to sell warranties, so while they might not lie to you, they might not be giving you the full story. There’s often clauses and caveats. It’s not always as simply as you just ‘getting a new one’.

    3. Ask the store/salesperson what the *actual* procedures are if something should happen. Sometimes the store will simply tell you to ship it off to some repair depot (at your expense) and wait months. Sometimes, it could take weeks/months to get fixed. It’s not always a matter of walking in the store and the staff happily giving you a brand new product.

    The reason why salespeople push it so hard is because of, well, commission. Most warranty companies aim to sell the warranty at a 100% markup, so the store is usually profiting about 50% on the warranty – it’s pure $$ for them. Same thing with things like cables and accessories. While the store will probably make $200 in a plasma TV, throw in some monster cables, some accessories, and a warranty, and that profit easy doubles or triples (along with the commission).

    Most stores will act all high and mighty and say the don’t hard sell or fear sell warranties, but the reality is that most do.

    Sometimes, it’s also a very aloof customer. I’ve had customers over the years that would buy HD-Megahertz-fluid for a camera if I sold them one. Sometimes, I would have customers that would ONLY buy a product if they could buy a warranty on it.

    As far as the ‘odds’ of something happening – read consumer reports. As time goes on, electronics tend to get more and more reliable (not just cheaper). Same thing with cars, modern cars, even from ‘average’ brands like GM, are vastly more reliable that most cars were 20 or 30 years ago. The stores/dealerships wouldn’t sell the warranties if they were loosing money on them, so generally speaking, the odds are in the stores favor.

    To each there own – I do know lots of people who have benefitted from warranties, but then again I’ve seen millions of dollars spent on warranties, the vast majority never paying out. Caveat emptor.

  9. Sara says:

    Extended warranties very rarely pay off. It’s better to take the money you would be spending on the extended warranties and instead put it in a savings account to use when one of the products breaks. I have read, however, that laptops are an exception and laptop extended warranties are often worthwhile.

    I have purchased service agreements for new cars. They cover the required service for keeping the manufacturer’s warranty and cost less than what I would pay for that same service without the agreement. Plus, they usually throw in valet service and free loaners.

  10. Thank you for this confirmation. I HATE people trying to hard sell things. I have a BS meter that goes crazy during situations like yours….even commercials.

    I want the straight story, no frills, no hoops or hype.

  11. MP3 says:

    I generally just reply that they must not have much confidence in their product if they think I need to be protected from their product breaking down.

    The dealership tried to sell me on extended warrantee on my new car, which I declined. And that was it. Unlike the other dealership where I was thinking of purchasing the car from who kept tut-tutting that I was making a big mistake by not purchasing the extended warrantee. After about 5 times of this patronizing attitude toward me, which I related to the fact that I was a woman and they thought they could bully me into the warrantee, I just got up and said thanks – but given the pitch it was clear they didn’t have confidence in the quality of their vehicle. And I left…

    I’ve seen electronic stores push warrantees on $40 and $50 items. It’s silly.

  12. getagrip says:

    I recently purchased a laptop for one of my kids from the place with geek folks. They offered a hundred dollars for a software only warrenty but it can cover any two other PCs. Since I had one at home that had just gotten the Windows 2012 security virus and I’d been told it would take $100 to clear that alone from a different PC repair place, I got the warrenty and have gotten the other PC cleared and plan on having a tower checked out. So it depends on what you need. But you have to be careful and sure what you’re getting. Often the warrenty is a way of getting you to bring the item back in and then they push non-warrenty repairs, services, or maintenance.

    On appliances see if the warrenty comes with a maintenance/repair service. We used this to have our treadmill serviced three times for free over so many years, chairs replaced and repaired on our kitchen table, and they’ll be coming out to do maintanance on our washer this weekend, etc. You have to read the warrenty, keep the paperwork, and be clear what you can and can’t get done.

  13. getagrip says:

    Sorry, the treadmill service wasn’t “free”, but it was part of the warrenty we paid for, as was the chair replacement. My point more clearly should have been that you can gain value from the warrenty if you use the maintenance services often provided in the fine print of the warrenty, e.g. the chair repair and replacement have allowed us to keep the kitchen table set for more than a decade with minimal problems, and just one chair replacement made up for the cost of the warrenty.

  14. Amy says:

    Oh my, we had the exact same experience buying our Prius! They act like it’s a last little bit of financing paperwork you have to go over, but it’s really hard hard HARD sell of their service packages. We had to say “no” at least a dozen times, and finally my husband said “You know, I’m about ready to walk out of here” and the guy finally backed off. It was so awful that we’ve vowed the next time we buy a car, we start the conversation with the car sales person (as opposed to the service package sales person) by saying we are not going to buy any service package, and if anyone tries to sell us one at any point we will leave and go to another dealership.

  15. AnnJo says:

    As a general rule, I consider service contracts to be worth about 20% of their cost. Given that, in buying big-ticket items like high-speed copiers/scanners for the office, I’ve used a service contract as a bargaining chip – Once I’ve gotten the price down about as low as I think is possible, I’ll say, “OK, I’ll take it at that price if you’ll throw in a service contract on it.” Because the sales person often gets a better commission on the service contract, they’ll usually write up the invoice with the service contract at full price, but reducing the price of the item some more. I’ve also had this work on the purchase of computers with Dell (I’ve always gotten a better price by purchasing over the phone with the catalog as a starting point, than simply ordering online), and the purchase of a new dishwasher.


  16. valleycat1 says:

    I’m loving the ad for extended warranties at the top of the page.

    When I’m in a hard-sell situation I turn into a broken record. ‘I’m not interested. I’m not interested. I’m not interested.’ After the 3rd denial, I politely leave without purchasing if they continue to insist. No need to get huffy about it or take it personally.

  17. valleycat1 says:

    The one area an extra warranty seems to pay off is a warranty when you buy a home (usually a one to two year term) – especially if some of the appliances or heating/cooling system are older. Almost everyone I know who’s paid for one has used it to replace an appliance that dies.

  18. Tom says:

    Here’s a nice tip – warranties are often negotiable in price. I’ve done it with a new car extended warranty and a kitchen appliance. Essentially, waffling out loud over really wanting the protection but not being willing to part with the money, combined with a salesperson willing to haggle has netted me some serious discounts.
    This technique may not always work, ie, a cashier at a big box retailer may not have the same leeway as a floor salesperson.
    I do agree though, they’re basically about more peace of mind than anything else, and for the clumsy among us :)

  19. Annie says:

    I never buy extended warranties on electronics, my father however purchased one at Sears for a Vacuum cleaner that was top of the line and i think that was a smart purchase. It was an additional 3 dollars a month and if there is anything wrong with the parts they either replace it or give you a new vacuum. He replaced many parts during a year and paid nothing for it. Also the filters and cleaning were also free.
    I guess it depends on what you are getting with the warranty.

  20. SLCCOM says:

    Valleycat, American Home warantee was worthless. Before you squander money on home warantees, check the company. Most of the time they will weasel out of everything.

  21. SLCCOM says:

    American Home Service, I think it was.

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