Extended Warranties Help Slim Margins

Amy asks how Dave feels about warranties on electronics. Dave says he doesn't believe in any extended warranties.

QUESTION: Amy on Twitter asks how Dave feels about warranties on electronics. Dave says he doesn’t believe in any extended warranties.

ANSWER: I don’t believe in extended warranties at all—on cars, electronics, anything. I’ve done the research, and I’ve seen the math. The math says that—depending on the item—about 75–85% of the amount you pay for the warranty is for marketing and commissions. If you pay $1,000 for a warranty, $750 of it is going to the dealership and to the salesman who sold it to you.

Electronics stores, for example, work on such slim margins, and they make their money on the financing and extended warranties. That’s why every single time you do a purchase there, you have to explain that you really don’t want an extended warranty on your chewing gum. It’s ridiculous, isn’t it? They’re going to peddle it because that’s where the room is.

About 12% is actually statistically the amount of money that it takes to insure the item against breakage, meaning that out of $1,000—if you paid for an extended warranty on a car—$120 would have covered your breakdown on average. Basically, you’re getting $120 worth of coverage and paying $1,000 for it. Or you’re paying $100 for it and getting $12 of coverage. It depends on how much the extended warranty is.

Self-insure through those items. If you can’t insure through the amount of breakage that a television has that isn’t covered by a warranty, you shouldn’t buy the television. You ought to have an emergency fund before you buy a television. Put the money in your pocket, and on average, only $.12 out of every dollar will go back out in actual expenses to cover the breakage. Extended warranties are very profitable. Don’t buy them.