Should you buy an extended warranty?

Most people give a fair amount of thought to buying an appliance or an electronic device. But buying a warranty for them gets barely any consideration.

If you do buy one, it will probably be out of emotion, fear or because the salesperson wore you down. And you’ll probably be wasting your money. But warranties aren’t hard to understand, and with a little grade school math, you can figure out the rare instances when it makes sense to get one.

A warranty is, after all, a bet, like any form of insurance. For a small price you are betting that something bad will happen that would cost you a lot of money. The other side of the bet is counting on the long life of your product. The company selling the warranty has the information on failure rates. You don’t. So all you need to know are the odds that your product will fail.

That’s not easy to find out. Companies aren’t in the habit of telling you that their products fail 4 percent or 12 percent of the time. Failure rates are usually low. Warranty companies know that. And they know, too, that consumers tend to think the failure rate is higher and that many of those consumers, being risk-averse, will buy the warranty.

The best, although not perfect, source of reliability data is Consumer Reports magazine. Ideally, you’d want data on every product over three or four years. The magazine has the information for brands in about a dozen product categories. And it gets that information by asking people to recall if the product failed during the period they owned it.

Imperfect though the data may be, it will correct for the human tendency to exaggerate the risk of failure. One hitch in all this? A subscription to Consumer Reports costs $30 a year, $7 for one month. I suppose you could go to the public library, but the information is not available free online.

In addition to access to information, the warranty company has another advantage. It knows you will probably do the math wrong. 

You are going to be calculating the repair cost of the product — $400 to repair a TV or $700 for a replacement tablet — and comparing that with the price of the warranty. SquareTrade, a reputable online warranty company, offers a $110, three-year warranty on a $1,000 TV.

The right math

It sounds like a good deal. But let’s do the math the right way. Consumer Reports’ survey of TV owners determined that 2 percent to 4 percent of major brand TVs need repairs.

Let’s say you want to buy a $1,000 TV. Assuming the magazine’s survey accurately captured repair rates, you should be willing to bet $40 that the TV will break. Say it is a brand in the upper range of failure rates, like a Samsung, Toshiba or Vizio, that fails 4 out of 100 times, which can also be expressed as .04. Multiply that rate times the price (.04 x $1,000) and the result is $40.

You’d be willing to pay $40 for three years of protection. Given inflation and the time value of money, close calls should go the way of not buying the warranty.

There is one other advantage the warranty company has: your emotions. You are more willing to pay to protect a device you love – a cellphone, a tablet or a TV – than something boring like a washing machine or a dryer. So the warranties on the loved products are going to be higher. The companies are playing with your emotions. Don’t let them.

Need proof? Refrigerators have about a 15 percent chance of failing. So on a $3,000 appliance you could expect to bet $450 that it will need a repair in three years. Any warranty for less than that is probably a pretty good deal. And sure enough, warranties are less than that.