Are Extended Warranties Worth It?

Would you like a little peace of mind with that gadget? According to Consumer Reports, Americans will spend over a billion dollars this holiday season on extended warranties.

But are extended warranties or service contracts a smart buy? Most consumer experts say they almost never are, for one simple reason: they’re expensive and aren’t often used.

Take digital cameras… According to Consumer Reports, fewer than 10% need repair within the first three years. And the cost of a one-year warranty on a $300 camera can easily add 60 bucks to the cost.

Also reliable are larger appliances. The cost of the warranty will likely outweigh the cost of a repair, and the odds of a repair being needed aren’t that great.

As with most rules, however, there are exceptions. Something portable like a cell phone is much more likely to be lost or broken than a TV. So, is the person you’re buying for accident prone? How long does the factory warranty last? And, of course, how much does the extended warranty cost?

Consumer reports suggests a good rule of thumb is to not pay more than 20% of the value of the item. And don’t leave home without checking out your credit cards… they may already offer some protection.

According to Consumer Reports, the profit on extended warranties approaches 50%, a much higher profit margin than on most merchandise. Maybe that helps explain the hard sell you often get at the checkout.

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