Why Extended Warranties Can Be a Waste of Money
Even if expensive goods fail after the warranty expires, there’s always the Consumer Guarantees Act to check out, writes Amy Hamilton Chadwick.
30 August 2023
If you’ve ever bought a large item from a major store, you have probably been offered an extended warranty. The extended warranty will cover you if the product fails or is accidentally damaged, and typically costs around 10 to 15 per cent of the purchase price. On a $1,000 camera, for instance, a three-year extended warranty might cost $100.
But is an extended warranty a sensible way to protect yourself against product failure – or a waste of money?
The Consumer Guarantees Act (CGA) automatically protects you against product failure and applies whether or not you buy any type of warranty. The CGA guarantees that goods must be of acceptable quality and must be fit for purpose. This mean that an item that should last a long time, but falls apart quickly, has not met the guarantee.
If there is a problem where the guarantee is not met, the supplier (or sometimes the manufacturer) must remedy the problem. They must repair, replace or refund. When it comes to expensive goods, even if they fail after the manufacturer’s warranty has expired, you may still be able to claim under the CGA.
When a store sells an extended warranty, there are many conditions they must meet, including telling consumers about the CGA and provide a comparison between the CGA cover and the extended warranty.
A Consumer survey found that 70 per cent of shoppers at Harvey Norman, Noel Leeming and Apple stores were offered extended warranties – usually on expensive items like whiteware and electronics. Only 2 to 3 per cent were told they were already covered under the Consumer Guarantees Act. Most respondents declined to pay for the extra warranty.
Extended warranties often cover your item against accidental damage, but you’re probably already paying for this cover with your contents or renter’s insurance. Both provide you with insurance against accidental damage to your belongings.
As soon as you buy a new fridge or PC, it is covered by your insurance, so do you need to pay twice to insure it? Check your insurance policy to make sure you’re not doubling up.
You may even find some purchases are covered by your credit card; a few cards have terms that provide free extended warranties for the goods you buy.
Buying an extended warranty might add 10 per cent to the cost of your large purchases, which is already a significant additional cost. But if you’re financing the purchase – buying on a credit card, store card, or via store finance – it becomes even more expensive.
For example, if you borrow $2,000 to buy a new washing machine and drier, at 14 per cent interest over 12 months, you’ll pay a total of $2,155. Add $250 in extra warranties and you’ll pay $2,424. That’s likely to be an unnecessary expense that gives you very few additional benefits over and above the CGA and your existing insurance cover.
A good idea?
It may be difficult to make a CGA claim against an overseas retailer, but if you don’t trust them to honour their obligations you should probably buy from a local store.
There may be an argument to make for an extended warranty if you’re buying large items for your business, particularly if the business can’t run without it – vehicles or machinery, for instance. Sales to business customers are not usually covered under the CGA.
For any personal items, however, you should feel confident saying “no” to offers of extended warranties, no matter how enticing the salesperson is making it sound. An extended warranty is nearly all profit for the company selling it, and the salesperson is very likely on commission. Keep your money in your own pocket.
Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.