To Extend Or Not To Extend....

Are Those Extended Warranties Worth the Dough?

Many retailers, both online, as well as brick and mortar, offer extended warranties. These are designed to extend a manufacturer's warranty, and offer piece of mind after the sale- at a price.

Over the winter, I purchased a new LCD monitor from Microcenter. If you didn't read that tale (and you really should!) you can check it out here. Thankfully, the monitor has been working quite well. Let's face it, the current LCD's have no moving parts, and therefore very little to break unless you drop them.

I was a little surprised last week when I received a letter from Microcenter trying to sell me an extended warranty for the monitor. Unlike Best Buy, Circuit City or Staple's, at least there was no "hard sell" and pushy sales people standing in front of my exiting shopping cart.

The pricing is what intrigued me, and prompted me to look at it more closely. For two years of coverage, it was $75. For four years of warranty coverage, the price was $105. Curiously, they did not have a price for three years of extended warranty.

Let's take a closer look, and run some numbers. First of all, I purchased the LCD panel for an affordable $199 after rebates. Checking the current circular reveals that the monitor is currently available for $189 after rebates. For these calculations, I'm assuming a conservative 4% interest rate, compounded annually. Over the two years, the $75 will be worth over $81 if we save it rather than sending it to Microcenter. This represents 43% of the current replacement price.

The four year plan doesn't seem like any better of a deal. Our $105 at that interest rate will have grown to over $122 in a presidential term. This is about 65% of the current price of the LCD.

There are a few other factors here that make this even a worse deal. The first is that, over time, the price of a 19" LCD will undoubtedly decrease. A few short years ago, this size monitor was over $500. While none of us can predict what the price will be for this monitor, we can be sure it will be less. The next factor is that four years from now, if the LCD fails, we may want a different monitor, whether larger, with different features, or from a different maker. With the extended warranty, we're locked in. The next issue is you don't actually get the full warranty. Since when is two years, not two years? When we remember that we already get three years of warranty included from the manufacturer (limited warranty)! If we had purchased it on a gold card credit card then we would have an additional year added to the warranty period. So we are already getting four years of limited warranty by purchasing on a credit card. What are we actually buying here? Simply the privilege of dealing with the store, and not with the manufacturer. The last issue is the "hassle factor." Even with the warranty, we have to return to the store, deal with customer service, and hope they don't try and wangle out of a replacement. If we had invested the cash, we could simply pick up another monitor at our convenience, or order it online.

Ultimately, we don't know what the chance is that the LCD monitor will fail. I would venture a guess that it's going to be less than 50% at four years down the road. The $105 fee, that grows to just under two-thirds of the replacement cost over the warranty hardly seems a good deal by that standard.

There's a phrase in Las Vegas: "The house always wins." In the case of these extended warranties, we're clearly betting against the house and setting ourselves up for a loss. While a friend may spin the tale of getting an upgraded replacement in the last month of the warranty period, very few of us will come out ahead on this. Did I send them a check to extend my warranty? Let's just say that Microcenter's offer was converted to confetti via the shredder!

--Jonas

Feel free to tell us your warranty experiences below.