If you’re reading this, you’re likely considering an expensive purchase or have recently been offered an extended warranty from a store or sales rep after making a purchase.

Extended warranties aren’t a new concept, by any means. Car and appliance manufacturers have offered them for decades. Today, however, it seems like extended warranties are offered for almost every small electronics purchase. Just the other day, I was offered an extended warranty when I purchased a $50 set of headphones.

Are extended warranties ever actually useful, though? Below, I’ll explain some benefits and drawbacks of extended warranties, and share my thoughts on which warranties can truly be useful compared to the multitude of overrated ones.

Regular vs extended warranties

As the name implies, an extended warranty is meant to pick up where a product’s factory warranty drops.

For example, many auto manufacturers offer a standard 60,000-kilometre warranty on vital components.

If the vehicle fails during this period, the manufacturer will cover the cost of necessary repairs. If the covered components fail after this period, though, you’ll have to pick up the bill yourself. That is, unless you’ve purchased an extended warranty to cover those components after the initial warranty ends.

Some brands or products come with exceptional manufacturers warranties. These brands often come with higher prices due to their higher quality and industry-leading warranties, which often make the purchase of an extended warranty unnecessary.

On the other hand, many lower-cost brands may be associated with poor build quality or may have sub-par warranties, making it more necessary to purchase an extended warranty.

Planned obsolescence: how it fits in

According to financial resource website Investopedia, planned obsolescence is an industrial manufacturing concept whereby products are designed to eventually fail, so that consumers will need to purchase a replacement. Many would argue that as technology has advanced, planned obsolescence has become even more prevalent with product lifespans lasting shorter and shorter.

As much as I love all of the tech features in my new smartphone, I’m reminded of the indestructible Nokia “brick” phones that I used to own every time my screen cracks and I have to pay to get it repaired.

Benefits of extended warranties

At a glance, some of the benefits of extended warranty programs include:

  • Coverage that fills in the gaps left by your manufacturer’s warranty
  • Coverage that offers to repair or replace damages caused after the regular warranty comes to an end
  • Peace of mind, knowing that you don’t have to be as cautious with your items as you would without a warranty

Drawbacks of extended warranties

As much as an extended warranty can offer peace of mind, though, there are some negative stories where consumers failed to read the fine print and are left hanging. For example, Hyundai would not honour an extended warranty purchased by a Toronto student, claiming that the two-year-old engine failed due to ‘abuse.’

With this in mind, some of the potential drawbacks of an extended warranty are:

  • Fine print that won’t honour the warranty under certain conditions
  • Warranties may cost more than repairs would realistically cost
  • Warranty providers may be difficult to communicate with and may route your calls through overseas call centres, leaving you waiting for hours
  • There may be an initial deductible that you’ll have to pay out of pocket, even for covered repairs

Types of extended warranties that are actually useful

Over the years, I, along with friends and family, have purchased some warranties that actually have been useful or have saved us money. Based on my experience, here are some warranties that I’ve found to be beneficial.

Automotive powertrain warranties

If you listen to most old-time mechanics, they’ll be the first to tell you that today’s cars aren’t built like they used to be.

While modern vehicles are quicker, quieter, safer, and more technologically advanced than ever, all of the extra features mean more moving parts, sensors, and computer systems that can become points of failure and cost thousands to repair or replace.

Pretty much every auto manufacturer offers a powertrain warranty designed to cover the engine and transmission for the first few years of ownership. However, after this relatively brief period (typically five years or less), you’ll be left to cover any unexpected repairs.

As an engine or transmission repair can easily cost up to $10,000, I believe that an extended powertrain warranty can be a good investment, especially given the spotty reliability of modern cars.

HVAC and appliance warranties

Similar to vehicles, home appliances have come a long way, and many can even integrate with your smart home system so you can control them from your phone. However, the manufacturer warranty periods on these advanced appliances may be relatively brief.

Often, these systems are so advanced that they’re difficult to repair and may need to be completely replaced if they fail, which can make an extended appliance warranty worth it.

Phone warranty and protection plans

These plans can be a lifesaver, especially for those who are clumsy with their phones. Even with the best heavy-duty case, a screen can break from an unlucky drop. Once that screen cracks, moisture can seep in and cause further damage, potentially rendering the phone unusable.

With new iPhones or Samsung Galaxy models costing over $1,000 to replace and basic screen repairs running up to $400, having a protection plan could make sense for you. A small monthly fee can provide coverage that saves hundreds of dollars in repair and replacement costs over time.

What value do you place on peace of mind?

At the end of the day, the decision to purchase an extended warranty really comes down to the value that you place on peace of mind. Many extended warranties, especially those offered for lower-cost items, are overrated and offer limited coverage.

However, some extended warranties, especially those that cover expensive daily-use items such as a new smartphone, computer, camera, or your vehicle, can save you thousands of dollars in a worst-case scenario.

Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers at Blueprint Financial.

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