If you have ever gone furniture shopping for your home, you would have encountered the option of purchasing an extended warranty for your household electronic product. This usually applies to items such as the TV, washing machine and vacuum cleaner.
The option of an extended warranty is often offered to consumers at the point of purchase, where they usually have less than 10 seconds to decide if they want to purchase it. 10 seconds is insufficient for a rational decision, so people usually make impulse decisions, be it a yes or a no.
In this article, we like to explain to you why you should say “No” to that extended warranty top-up option.
Instead of solely using a mathematical explanation, which might bore you to death, we will explain through a combination of logic and maths why you do not need that extended warranty.
Manufacturing Warranty Is Usually Sufficient
The manufacturer of the product would usually provide a warranty. This warranty is meant to cover the product in the event that it goes faulty to begin with.
Think of it from this perspective. Is a product more likely to spoil within the first 1 to 2 years, when it is already covered under the manufacturer’s warranty? Or the subsequent years when it is covered under the extended warranty?
If a product that you purchase is already faulty, malfunctions are likely to occur early. This is usually within the first 1-2 years of use, which is covered by the warranty. The probability of malfunctions occurring in the 3rd and 4th year of use should actually be lower, since the product would already be ascertain as non-faulty.
Given a long enough time, the product would finally encounter major problems. There is a good chance that will happen after the extended warranty has expired.
Essentially, what we are saying is that the extended warranty you are paying for covers the period where the product is less likely to require a warranty during its lifetime.
Depreciation Of Electronic Products
Like it or not, all electronic products depreciate over time, and rather quickly as well, given the pace of technological advancement.
Chances are, the television set you bought 5 years ago at $5,000 is worth less than $1,000 in the market today. Even products such as the iPhone lose half of its market value within 2 years.
If we assume the depreciation of an electronic product is 20% per year, then the full value of a used product after 3 years would only be about 40% of its original retail price. For example, a product that cost $1,000 would only be worth $400 in its 4th year.
The question now is whether it is worth buying an extended warranty today to cover a product that is worth $400 (in 3 years time), when the warranty kicks in, and not $1,000 as what you think the original price was.
Price You Are Paying
Ultimately, whether an extended warranty is really worth buying depends largely on the actual price you are paying. So we decided to take a look at the extended warranty option provided by Courts to determine if the warranty is worth buying.
Courts have different warranty depending on the variables. For our calculation, we decided to focus on TV Set.
If you purchase a $600 TV set today that comes with a 3-year manufacturer warranty, you have the option to add an extended warranty of 2 years for $99. Based on our 20% per year straight line depreciation guideline, the television set would be worth $240 in it’s 4th year and $120 in it’s 5th year.
|
Year |
Value Of TV Set |
|
First |
$600 |
|
Second |
$480 |
|
Third |
$360 |
|
Fourth |
$240 |
| Fifth |
$120 |
The average value of the TV set would be worth $180 in its 4th and 5th year. So the question you need to ask yourself is whether it is worth spending $99 to buy a warranty for a product that is worth $180 at that point in time. The other question to also ask is whether a simple repair could be cheaper than a warranty to begin with, or if the product is even worth repairing.
It is not possible for us to give a blanket statement to say that all extended warranty will not be worth purchasing, since it really depends on the actual details of the warranty. However we hope that you think a little harder about whether you really need the extended warranty that is being offered to you and whether it is worth your money.
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