Average cost of a dishwasher repair: $159.
The fact that service contracts often cost about the same as a repair is just one reason extended warranties -- also known as service contracts and protection plans -- are hardly ever a good deal. After all, what if you never need a repair? Then that's $157.97 you didn't have to spend.
"You can insure your life against every possible calamity, but you'll go broke in the process," said Anthony Giorgianni, associate finance editor at the nonprofit Consumer Reports. "You are paying for something in advance with the hope that they'll cover you when something goes wrong, but you may not need the service, or it may not be available."
Despite the reasoning above, nearly a third of consumers surveyed purchased extended warranties for things such as TVs, cellphones, computers and appliances. These folks have made extended warranties a $40 billion annual industry. Here's why that money is better off in your own wallet.
Not actually extended: Despite the name, the Federal Trade Commission says many "extended" warranties go into effect at the same time as the manufacturer's warranty. Plus they contain language requiring you to tap the manufacturer's warranty first. This means you could be paying for duplicate coverage.
Lots of exclusions: Complaints to the Better Business Bureau show that many consumers are frustrated to find that their extended warranty won't cover their problem because of "exclusions" in the fine print of the contract. For example, some service contracts won't cover routine maintenance, accidental damage or preexisting conditions. Others exclude specific parts. One refrigerator service contract Consumer Reports reviewed did not cover ice makers, beverage dispensers, door seals or gaskets, hinges, lighting, or handles. Your extended warranty could also be voided if you don't perform certain routine maintenance.
Deductibles and fees: When you are comparing the cost of an extended warranty with the cost of paying for repairs yourself, you must factor in the deductibles or service fees many warranty companies charge each time you make a claim.
Must mail the product: While we're tallying up costs, some extended warranties require you to ship your broken product somewhere for repairs. That's an expense and a long period of time that you'll be without the item.
No servicer selection: Other extended warranty contracts provide a local repair facility but give you no choice of which one. The shop may have a bad reputation or be inconveniently located.
Shop must get permission: If you are given your choice of repair shops, it's typical for the shop to have to get preapproval from the warranty company before it performs the work. Many shops will balk at this layer of bureaucracy.
Third-party companies: Many extended warranties are sold by retailers and backed by third-party companies, rather than by the manufacturer of the product. Some consumers have complained that the salesperson never "activated" their service contract, so the warranty company refused to honor it. Other times, these third-party warranty companies have gone out of business, leaving consumers with nothing for their money.
If the reasoning above has persuaded you not to spend your money on an extended warranty, but you still worry about having to pay for a repair, there are steps you can take to protect yourself.
Research good products: If you do the homework of choosing reliable products, they are less likely to need repairs. Consumer Reports has been testing products for more than 80 years and says today's merchandise is often built to last. "These days technological advancements happen so quickly that you may want to replace the product before it ever breaks down," Giorgianni explained.
Credit card protection: Many credit cards will extend the manufacturer's warranty for a year or more. You can easily research which of your cards offers the best warranty benefits and use that one when you make big purchases.
Contact the manufacturer: Even if your official factory warranty has expired, the manufacturer may agree to help you. Why? "Manufacturers often will go above and beyond the express warranty in satisfying you," Giorgianni said, "whether it's covering something that's not covered or extending the coverage beyond the warranty period, because they don't want to lose customers."
Implied warranties: There are two guarantees you receive free, thanks to the government. The first is called an "implied warranty of merchantability," which means that a product must do what it's supposed to do. A blender must blend, and a washer must wash. There's another called a "warranty of fitness for a particular purpose." For example, if a salesperson advises that a particular computer is powerful enough for gaming, then he or she is warranting that it is. These unwritten warranties apply unless the product is marked "as is" when you buy it. Some jurisdictions do not allow as-is sales. If you buy something that doesn't work, ignore the notices saying not to take it back to the retailer and do just that, citing these implied warranties.
Create a repair-or-replace savings account: Still worried? Instead of shelling out for an extended warranty, put that money into a designated repair-or-replace savings account. Thanks to online banking, it's easy to set up "micro accounts" for things such as this. "Sell the coverage to yourself," Giorgianni said. "With an extended warranty, you may be covering the fridge, laptop or car, but something you didn't cover breaks down. Now you can use that money from your product repair-and-replacement fund for that problem."