Why You Shouldn't Buy an Extended Warranty

Have you ever gone to the local Best Buy or Circuit City to go and get that big television or latest digital camera that you've been saving for months for, only to be hustled by a pushy salesman trying to sell you an extended warranty? Big box stores are pushing extended warranties like ever before for practically everything that's not consumable, but are they worth buying?

Often times you will hear friends and relatives who had a piece of electronics, an automobile, or something like that break down, and use their extended warranty to pay for the cost of the repair. In their situation, it seems to have worked well for them. With all of the stories we hear sometimes we might think it makes sense to go out and buy the extended warranty for our next major purchase.

The stories are nice, but mathematics tell us otherwise. For every time one of your friends went out and gotten a product that had an issue and were saved by the extended warranty, there were probably another 10 or your friends who made a similar purchase and their extended warranty went to waste.

Here's the problem with extended warranties. When you buy an extended warranty, you not only have to pay the cost to insure the item, but you also have to pay for marketing cost, a commission to the sales person, and additional profit margin for the issuer. Consumer reports even tells us that about 85% of the money we pay for an extended warranty goes to commissions and profit for the issuer, only 15% of the money you pay in is going toward the cost of insurance. In essence, you are paying six times the amount of the average amount of repairs the device or item you have purchased you need. It just doesn't make sense mathematically.