Extended Product Warranties: To Buy or Not to Buy?


Announcer: Welcome to Stuff You Should Know from howstuffworks.com.

Josh Clark: Hey, and welcome to the podcast. How are you, Chuck?

Chuck Bryant: I'm good. This is Take 2. We rarely do two takes but Josh messed up so bad we had to do Take 2.

Josh Clark: Should we tell them what I said?

Chuck Bryant: No.

Josh Clark: Okay.

Chuck Bryant: Because then we'd have to do Take 3.

Josh Clark: All right. Well, anyway, this is Stuff You Should Know, and as Chuck just said, it's Josh here and Chuck there. And we were talking earlier about how it's getting to be that time of year again.

Chuck Bryant: Right. 'IT is the season'.

Josh Clark: Time to go cut down a perfectly healthy tree, prop it like some sort of corpse in the corner -

Chuck Bryant: Hang things on it.

Josh Clark: Yeah, exactly, decorate it, shuffle into the malls and turn out our pockets.

Chuck Bryant: Right. Buy things for your family and friends.

Josh Clark: Right. Have the endless debate over whether or not Walmart greeters should say Happy Holidays or Merry Christmas and just basically celebrate another year passed of surviving.

Chuck Bryant: Right. That's what we do at my house since Christmas is all about the survival of yet another year.

Josh Clark: Yeah, opening soup cans with pen knives and -

Chuck Bryant: Yeah, it's good stuff.

Josh Clark: Yeah. So, yeah, I guess what Chuck and I are saying is the holiday season, it's upon us. And clearly the one question that always comes to mind for me is should I or should I not buy an extended product warranty.

Chuck Bryant: Right. And I know a lot of times our podcasts are really interesting tidbits that you can share at the water cooler -

Josh Clark: Yeah, not this one.

Chuck Bryant: Well, no, this isn't interesting in that way but I think a lot of people don't know whether or not to purchase them because they're faced all of a sudden at the register and they're kind of in a panic so we're trying to help you out here.

Josh Clark: Exactly. This is precisely why we're broadcasting this podcast. It's - I never knew and once I found out, I was happy to know actually.

Chuck Bryant: Sure. Because, yeah, it's become like this real high pressure sales pitch and it comes when you're almost out the door and then all of a sudden, like, oh, well, of course you want the extended warranty, right? And I'm, like, I don't know. Do I?

Josh Clark: Right, it's, like, do you want the apple pie at McDona lds.

Chuck Bryant: Yes.

Josh Clark: All of a sudden you're thinking, I don't want an apple pie -

Chuck Bryant: But I want an apple pie.

Josh Clark: - but I want an apple pie.

Chuck Bryant: And I gotta say, especially back when it was fried, I always wanted an apple pie from McDonalds.

Josh Clark: Oh, they're not fried anymore?

Chuck Bryant: No, they're baked. They're still pretty good but, dude, compared to the fried ones, -

Josh Clark: Yeah, flaky goodness.

Chuck Bryant: Yes, you can still get the fried apple pies at Checker's by the way.

Josh Clark: Well, can you get a warranty on the apple pie is what I want to know?

Chuck Bryant: Well, you could maybe if - if you should, probably not.

Josh Clark: Right.

Chuck Bryant: And that's actually one of the reasons. There's several - there's no definitive answer whether should you - you should or shouldn't get an extended warranty on a product. Sorry to break it to you. We can't just say, no. And we'll get into some reasons or some situations where it is a good idea to maybe opt for one -

Josh Clark: Right, or not a good idea.

Chuck Bryant: Right. We'll do both but if you look at it from the law of averages, across the board, it's a bad idea to buy an extended warranty. Just statistically speaking, either the product you have is going to break within the first year, which is covered by the manufacturer's warranty that all items come with -

Josh Clark: Right, generally.

Chuck Bryant: - or it's going to break after the extended warranty has lapsed so either way, just speaking on averages, you're going to have just wasted X amount of dollars that you never used. And it's really just an insurance policy, which again, is a form of gambling.

Josh Clark: Right.

Chuck Bryant: Right. And, for the most part, an extended warranty is a losing bet but there are some instances where you might want to stop and say, you know what, sales jerk, I am going to buy that extended warranty. You want to give them a few?

Josh Clark: Well, I mean, first I just want to throw out a few - you know, I'm stat man, a quick stat. Americans spend $16 billion a year on extended warranties. That's a lot of dough.

Chuck Bryant: Yeah, I've got another stat for you that's going to pop your eyes out. 80 percent of that, profit. Only 20 percent of that $16 billion spent on warranties is ever shelled out in repairs or replacements.

Josh Clark: Well, should we just end the podcast right there?

Chuck Bryant: Exactly. Happy holidays, everyone.

Josh Clark: Yeah, that sounds like your answer. There's a - yeah, that's pretty much - speaking by the numbers, you're a sucker if you buy an extended warranty, but there's some instances where you're not a sucker. And, actually, another stat there for you, Chuck, did you know that Circuit City - 100 percent of its operating income in 2004, as far as securities analyst were concerned, came exclusively from the sale of extended warranties.

Chuck Bryant: You're kidding?

Josh Clark: And I think something like -

Chuck Bryant: You know, they're going out of business though so maybe that should tell you something.

Josh Clark: Well, the problem is if you're not selling electronics, you're not going to sell an extended warranty. If you're dependent - that dependent on extended warranties, then, yeah, you're going to go under when the electronic sales plummet!

Chuck Bryant: No wonder they push it so hard at the register, you know.

Josh Clark: Oh, yeah, it's big time. And Best Buy actually - they - I think in that same year, 50 percent of their operating income came from extended warranties.

Chuck Bryant: Yeah, you know, I'm not allowed to go within a 100 feet of a Best Buy so -

Josh Clark: They have everything you need.

Chuck Bryant: I wouldn't know. My wife won't allow it. She has a complete boycott going.

Josh Clark: You don't know what you're missing, Chuck. They have everything. It's good stuff.

Chuck Bryant: Well, that's great, but, yeah, I'm not allowed.

Josh Clark: And, actually, Best Buy also has extended warranties on absolutely everything. There is a guy who - no, a gal, I'm sorry, who was writing for Business Week wrote an article on extended warranties that I came across and she said that Best Buy sells a $49.99 four-year extended warranty on a Magnavox DVD Player that they sell for $39.99.

Chuck Bryant: Wow. That doesn't make sense.

Josh Clark: No.

Chuck Bryant: Economically speaking.

Josh Clark: No, it makes no sense whatsoever.

Chuck Bryant: I don't know what Adam Smith would say about it but - famous economist.

Josh Clark: Oh, I know.

Chuck Bryant: Okay.

Josh Clark: He's one of my hero's, as you're well aware.

Chuck Bryant: Right. So, we got a little sidetracked.

Josh Clark: Okay. So, yeah, we could sit here all day and punch holes in extended warranties and call you a goon if you've ever purchased one. To each his own though. That's kind of our unofficial motto here at Stuff You Should Know. So, let's tell them some times when they should.

Chuck Bryant: Right. One reason I've got for you Josh is if it's a high dollar item. If you're going to spend several thousand dollars on an item, like, let's say the big flat screen or something like that, it may be worth the couple of hundred bucks to cover it a little longer.

Josh Clark: Yeah, I mean, you've already shelled out several thousand, what's the harm. And this actually comes into play most often with rear-projected TVs which can run into several thousands of dollars. And, apparently, the typical rear-projections TV, the bulb used in the projector is rated for about 5,000 hours of use and if you buy an extended warranty, if you're an average American, you're going to watch more than 5,000 hours on that TV within that three-year period.

Chuck Bryant: Right. That's a lot of TV, man.

Josh Clark: It is but I think - yeah, just speaking on averages and statistically, you're going to watch that much in three years so when that bulb finally goes out, you'll be covered. So, that is a specific instance where it's a pretty good idea to go ahead and shell out an extra $400.

Chuck Bryant: Yeah, I know if you have a PC laptop or home PC, it might also be a good opportunity to buy one because I think there is a 37 percent chance that it's going to need repair within that three-year period.

Josh Clark: Yeah, and actually PCs rank at the top for needing - the percentage that they'll need a repair in three years.

Chuck Bryant: Right and it's not cheap to get it fixed either. That's something else you have to consider.

Josh Clark: No, and those things usually come with tech support, which I think Apple, their tech support after, you know, their manufacturer's one-year warranty goes away, each call goes up to, like, $40 or $49 and that's pretty much industry-wide. They're expensive phone calls so, yeah -

Chuck Bryant: Well, you're dialing straight to India so I imagine that costs a little more.

Josh Clark: Exactly. Exactly. Did you know that there's a McDonald's in Massachusetts where the drive-thru, you're actually speaking to a call center in Colorado?

Chuck Bryant: You're kidding?

Josh Clark: No, I kid you not. They outsourced the order taking and then the people type it in on a computer screen and then back at the Massachusetts McDonalds your order is filled. That's what they call tangential.

Chuck Bryant: Right.

Josh Clark: Yeah. So, okay, let's get back to times when you should get an extended warranty.

Chuck Bryant: Right. Cell phones!

Josh Clark: Yeah.

Chuck Bryant: I know you mentioned was a good one because they're easily breakable or lost.

Josh Clark: Yeah, if you are absent-minded, if you lose stuff a lot, then you probably want to spring for some sort of extended warranty specifically with the cell phone. A lot of extended warranties won't cover loss, theft, or accidental damage. They'll usually cover some sort of manufacturer defect or if the thing died a natural death within this time but the cell phone warranties are designed specifically for people who lose their phones so you're going to pay, like, $5 a month extra and then you're going to be slapped with a deductible when you call it in but say it's a $400 Blackberry and you're deductible is a $125, you're still going to pay less than you would for getting that Blackberry.

Chuck Bryant: Right, so it's kind of up to you to do the math and to look at yourself in the mirror and determine if you're one of those people that forgets and loses and breaks and -

Josh Cla rk: Right. And that's our advice to you. Don't go into a store to buy a cell phone or a rear-projection TV or anything else without doing some homework first. Find out if it will break within that time or -

Chuck Bryant: A little consumer reports action.

Josh Clark: Yeah, yeah, exactly! That's a very helpful site. And it's actually worth the subscription, too. There's some really great information on there you can't get unless you're a subscriber.

Chuck Bryant: Right.

Josh Clark: So, know the product, know yourself and then when the sales guy says, oh, yes, of course you want the extended warranty, you'll know on the spot, yes or no.

Chuck Bryant: Yeah, it's good to have your mind made up ahead of time.

Josh Clark: Exactly. And you won't have to second-guess yourself. If you do second-guess yourself and you didn't get an extended warranty but you decide that you want one, most states - state law says that you've got 30 days to purchase an extended warranty for that price and I believe most states also give you 30 days to cancel it after you get it. You should probably check with your state - I have no idea what state department would concern themselves with that but I'm pretty sure if you type in extended warranties under your secretary of state, there you go, I'll bet you that's it. If you type that into your secretary of state search bar, you're probably going to come up with something, right?

Chuck Bryant: Right, I would say so.

Josh Clark: Okay. So, now you know some instances when it's a good idea. When is it not a good idea, Chuck?

Chuck Bryant: Well, no, I would say it's a bad idea - first of all, you should look at your credit card. Most credit cards, American Express and MasterCard will automatically insure your item for an extended period of time upon purchase.

Josh Clark: Right. The high-end Visa and MasterCard's, the more expensive ones, they'll insure it but I think all AMEX cards insure - add an extended warranty on so you may be paying for something that's already covered. And another thing that we failed to mention earlier is because you're automatically covered for a year from the manufacturer, you're paying for three years, it's not three years at the end of that one year, it's three years from the point of purchase so you're actually paying for a year that's already covered anyway.

Chuck Bryant: By the manufacturer's warranty. Right. So, it's a bit of a scam there.

Josh Clark: It is. A three-year extended warranty is actually just a two-year extension on top of the warranty that you're getting.

Chuck Bryant: Right. You also have to pay for shipping most times, both ways, so if you're going to ship your cell phone to Verizon and then back, you might be spending more money and waiting on your phone, it might be worth it just to go in and get another phone. Recycle the phone that you had.

Josh Clark: Yeah, if you are, you know, so basically I guess if we were to sum this up, we would say if you are caught on the spot and asked whether you want an extended warranty and you can't make up your mind, go with no. If you decide that you do want one, actually purchase it from the manufacturer. You don't want to purchase an extended warranty from a retailer. Sorry, big box electronic stores - because they basically take out insurance policies on each warranty and pocket a substantial amount of the money you've just given them. The manufacturer's warranty should be a lot cheaper and there's no middle man for you to ship to. You can just deal directly with the manufacturer, too. Plus you have 30 days to consider it so don't jump on the spot. This Christmas season, remember the reason for the season, knowing whether or not you should purchase an extended warranty.

Chuck Bryant: Right. I had a real bad experience with one recently so -

Josh Clark: Let's hear it, Chuck.

Chuck Bryant: Well, I'll do it quickly here. I typically never buy them because I think it's a little bit of a suckers bet but I bought kind of a high-end washer a nd dryer from a store - can I mention - our producer Jerry is shaking her head no.

Josh Clark: No.

Chuck Bryant: So, we will not mention the big box appliance store that I bought it from but we bought the warranty; the washer broke and it took seven visits, seven separate visits that I had to take off time - seven times from work, wrong parts were ordered - basically the problem was the company that they had contracted to fix it was awful and this big box appliance store, their argument was take it up with them. My argument right back to them was, since you don't give me a choice of who to use, then they are you essentially. And they didn't see it that way and they just basically quit returning my calls. I fixed it myself and they quit returning my calls.

Josh Clark: Wow.

Chuck Bryant: So, yeah.

Josh Clark: So, what'd you do, burn the store down or anything like that?

Chuck Bryant: No, I'm going to go in and try and get my money back on the warranty at some point but I will never shop there again and I've tried to spread the word even though I can't do it now.

Josh Clark: Yeah, there you go, listeners, now you know what store to avoid. Apparently, big box electronic store. If you see one with that sign hanging out front, stay away but stick around because it's time for listener mail, right, Chuck?

Chuck Bryant: That's right.

Josh Clark: Okay. So, Chuck, I get to read this one. This one is from a guy named Alexander -

Chuck Bryant: This is complimentary which makes me feel good.

Josh Clark: It is very complimentary. It's probably the highest compliment that's ever been paid to us via e-mail - via electronic mail. Alex writes to use from Attleboro, Massachusetts and it's on the How prayer healing works, podcast. Alex says that he likes our podcast. He appreciated it. Knowing your love for all things scientific, I thought for sure it was going to be open season on any religious topic, especially prayer healing but the fair and even discussion of the subject really speaks to your dedication to truth and discovery. I appreciate your discipline in applying the same high standards of research to this topic despite any of your personal opinions. That's real integrity and now have an even greater respect for your work.

Chuck Bryant: How's that?

Josh Clark: That's high praise, Chuck, and actually he says that he's a Christian Scientist and he gives extra kudos to you for knowing their preferred method of treatment and how the results would be different than prayer plus medical procedure. So, way to go, Chuck! Way to go to both of us.

Chuck Bryant: Yeah, made me feel good.

Josh Clark: Yeah, you should feel good, Chuck.

Chuck Bryant: WE try and be fair and balance. Forget Fox News, this is where it's fair and balanced.

Josh Clark: Exactly. Yeah. So, if you want to let Chuck know, you know, give him extra kudos, let us know we're fair and balanced, tell us that you hate us because we are against big box consumer electronic stores, send us an e-mail to stuffpodcast@howstuffworks. -

Chuck Bryant: - com.

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