Warranties don't always add up

Consumer advice experts generally agree on one thing about extended warranties: They are seldom worth the price. But consumers keep buying them.

Why would we shell out $40 for an extended warranty on a $200 digital camera? It's an emotional decision.

Warranties are insurance, experts say, and as such should protect you against financial disaster, not little things. Putting the money you would have spent on warranties in a bank account can do the same thing after time-giving you enough to pay for repairs or replacement.

Some offer enhancements to a manufacturer's warranty, such as in-home repair, replacement and quicker turnaround times so you can continue using the product sooner, all of which reduce potential hassle for the consumer, said Timothy Meenan, executive director for the Service Contract Industry Council. Meenan also points out that many extended warranties can be canceled within 30 days for a full refund and/or later for a prorated one.

Here's what drives consumers to buy extended warranties specifically on electronics, according to researchers.

- Pleasure principle: Consumers are more likely to buy extended warranties on items used for fun and pleasure. Why? Because we value those purchases more than practical and functional ones.

So, we're more likely to buy an extended warranty on an exciting high-definition TV than we are on a boring computer printer, said Tao Chen, an assistant professor of marketing at the University of Maryland who co-wrote a paper, "Why Do Consumers Buy Extended Service Contracts?" published in the Journal of Consumer Research. "They feel the hedonic product is more valuable to them," she said. "Their valuation is more than the dollars they paid for it." So, even with two purchases that are the same price, have the same likelihood of breaking and cost the same to repair, we might make different decisions on warranties based on how jazzed we are about the product.

- Surprise price break: If you go to a store to purchase a computer and discover an unadvertised sale on it, you're far more likely to buy a warranty because of mental accounting. You've mentally allocated a certain amount of money to buy the product. So it's easy to spend the "found money" savings on a warranty. Besides, the price break puts us in a good mood, and happy moods generally make us more risk-averse, nudging us toward a warranty, Chen said.

- Wealth: Maybe surprisingly, poor consumers - those who can least afford it - are more likely to buy added warranties than rich ones. "Richer people can afford to replace it. They can self-insure," Chen said.

- Gender: Men and women buy extended warranties at the same rates, but for different reasons. Women buy them because they are generally more risk-averse, Chen said. Men buy them to reduce future hassle - because, especially with electronics, the chore of repairing and replacing generally falls to men, she said. "If the replacement cost is high, men are more likely to buy (an extended warranty)," she said.

So, how do we use these findings to be better consumers?

Besides being skeptical of extended warranties, try to set aside emotions and gauge the risk the item will break. Find out the potential repair or replacement costs. And assign a dollar value to the "peace of mind" of a warranty to determine whether the cost is still worth it.

ABOUT THE WRITER
Gregory Karp is a personal finance writer for The Morning Call newspaper in Allentown, Pa. Readers may send him e-mail at greg.karp@mcall.com.

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