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Nebraska Business Tip: Are Extended Warranties Needed?

Davidson Shares Insight on Small Appliance or Electronic Warranties
by Jennifer Davidson, Associate Professor of Practice in Economics, Nebraska Council on Economic Education President and Nebraska Bankers Association Faculty Fellow
Nebraska Business Tip: Are Extended Warranties Needed?
Jennifer Davidson, associate professor of practice in economics, Nebraska Council on Economic Education President and Nebraska Bankers Association Faculty Fellow, shares about extended warranties.

It’s holiday time. Families will be making purchases of gifts to give to their family and friends. Inevitably, when the purchase is a small appliance or electronic, the purchaser will be asked if they want to add an extended warranty to the purchase. In most cases, this is unnecessary and a waste of money.

Extended warranties are a huge business in the United States. Excluding vehicle warranties, consumers are spending roughly $23 billion annually on protection plans for appliances, electronics, computers and mobile phones, according to Retailers may push you to purchase extended warranties as they are cash cows for them. Consumer Reports found stores keep 50% or more of what they charge for these contracts.

Consumers tend to purchase these extended warranties as they overestimate the likelihood a product will need a repair. Appliances and electronics are fairly reliable today, especially during the short, often two-year extended warranty timeframe. Most often, small appliances and electronics already come with a manufacturer’s warranty, often lasting up to one year. If the item worked well the first year, it is likely to continue to work for a second year, meaning purchasing an extended warranty was a waste of money.

In addition to considering the included manufacturer’s warranty, consider what it would cost to repair or replace an item before purchasing an extended warranty. People tend to overestimate this as well. A recent Consumer Reports survey indicates the cost of repair is often not much more than the cost of the extended warranty service plan. Given these warranty plans often go unused, it is much better to skip the extended warranty and spring for a repair or replacement in the unlikely event your product needs it.  

Of course, there are occasions when purchasing an extended warranty might make sense. It is a personal decision and depends on your level of risk aversion, wanting to share risk and how you take care of your purchases. For example, a smartphone warranty may make sense for you if you (or your teenager) choose a case for aesthetics rather than protection, handle your phone a lot and tend to drop it. Phone screens can crack easily and purchasing a warranty could shield you from the expense of regular glass replacements or other damage or even loss. As true with most decisions, the best choice depends on your situation. The best defense to a bad decision is to be informed.

When it comes to extended warranties on small appliances or electronics, in general, just say no.

Published: November 30, 2023