You know the drill: You're in final negotiations to buy a new car and the dealer is urging you to protect your $20,000-plus investment by purchasing an extended warranty (also known as a service contract). Or, you get a similar pitch at the checkout line when buying a new appliance or electronic device.
Are these costly add-ons worth the expense or simply a sucker bet intended to boost the seller's bottom line? It depends on whom you ask.
According to consumer watchdog organizations like the Federal Trade Commission and Consumer Reports, extended warranties and service contracts often don't make strong financial sense. However, some people find extended warranties reassuring, especially for large purchases with electronic components that can go awry and are expensive to repair or are easily broken.
Before you buy an extended warranty, do your research and consider these points:
• Does it overlap with the manufacturer's warranty? Don't pay twice for duplicate coverage.
• Many credit cards automatically extend the manufacturer's warranty for up to a year on purchases -- for free.
• Before purchasing, check the company's track record with your state's Department of Insurance, the Better Business Bureau and independent reviewers like Angie's List.
• Service contracts might not cover specific product parts or repairs. If the terms don't list a part or function as specifically covered, assume it's not.
• Carefully review the contract for deductibles, limits on the number of allowable service calls, exclusions and clauses that allow the company to deny coverage -- for example, if you don't follow their instructions for routine maintenance.
• Ask whether the retailer handles repairs itself. You may be required to mail the product to a repair center, so factor in shipping costs if they're not included.
New cars typically come with a basic factory warranty that covers most components for at least three years or 36,000 miles (sometimes more), as well as separate warranties for items like the powertrain, corrosion and roadside assistance.
Before purchasing an extended car warranty from the dealer or a third-party vendor, consider:
• If you plan to sell the car before the basic warranty expires, an extended warranty probably doesn't make sense; however, if you'll likely keep the car for many years, it may.
• Don't feel compelled to buy an extended warranty immediately. Policies can usually be purchased months or years later -- although the cost will increase as the car ages.
• If buying an extended warranty through the dealer, find out whether it's backed by the manufacturer (which means you can go to any dealership throughout the country) or by a third party, which could limit your repair options considerably.
• Most carriers sell a variety of plans at varying costs, duration and mileage limits - everything from basic powertrain-only policies to comprehensive bumper-to-bumper coverage.
• Ask whether the warranty can be transferred to a new owner - that'll boost resale value.
• Extended warranties are also available for used cars. They're more risky to buy than new cars and thus may be better candidates. However, the older the car, the more expensive - and limited -- the coverage likely will be.
As an alternative, consider putting the same amount into a savings account. That way, if the product breaks, you'll have enough money on hand to replace it. If not, you'll have a nice chunk of change.
Bottom line: If it will make you sleep more soundly, consider extended warranties for your major purchases. Just do your homework first and realize that peace of mind may cost much more than any repair bills you ultimately need.
Jason Alderman directs Visa's financial education programs. To Follow Jason Alderman on Twitter: www.twitter.com/PracticalMoney.