You might be tempted to buy a service plan--also known as extended warranty--on your next laptop, dishwasher, or a new or used car. But chances are that what you spend will be money down the drain.
Retailers may push hard to get you to buy these plans because they're cash cows for them. Stores keep 50 percent or more of what they charge for these contracts. That's much more than they can make selling products.
In our latest survey on electronics buying, seventy-three percent of in-store shoppers said that sales staff had pitched them the idea of buying a service plan. Perhaps that explains why in-store electronics shoppers were somewhat more likely than online shoppers to buy a plan (15 percent vs. 8 percent). Overall, the median price paid for a plan was $75 in-store and $65 online.
Our survey results were similar for those who bought major appliances. Eighty-five percent said their checkout didn't conclude without at least a suggestion that they purchase a service plan. At some stores, shoppers felt "strongly urged" to spring for the extra coverage. The median price paid for a plan was $118 for a major appliance and $37 for a small appliance.
There are many reasons why we recommend against buying service plans:
Repairs may be covered by the manufacturer's warranty. Although manufacturers' written, or "express," warranties often don't last as long as they used to, there's a good chance your product is covered for at least 90 days or longer. Buying a service plan may not only duplicate coverage you already have, but it sends manufacturers a message that limiting their express warranties will increase the sale of service plans. You shouldn't have to pay extra to get manufacturers or retailers to stand behind their products.
Products seldom break within the service plan window. Our data show that products usually don't break during the two-to-three-year period after the manufacturer's warranty expires and the service plan is in effect.
Repairs aren't that costly. When electronics and appliances do break, the repairs, on average, cost not much more on average than a service plan. The median difference in our latest survey was $16.
Manufacturers sometimes cover out-of-warranty items. If a product breaks down in an unreasonably short time or if there's a known problem affecting many customers, manufacturers often will help by replacing the item free or at low cost or by providing free or discount parts or repairs. So contact the manufacturer and ask for help. If necessary, appeal all the way to the executive office.
Your credit card may have you covered. Many credit cards automatically extend the manufacturer's warranty up to a year or so on many products purchased entirely with the card. The coverage is free.