Extended Warranties: A Bad Deal for Business Tech Buyers

Extended warranties are big business for technology vendors. It doesn't matter whether you're buying a $2,000 laptop or a $50 MP3 player -- when you buy the product, chances are you'll also get an offer to buy an extended warranty.

Some buyers absolutely refuse to pay for an extended warranty, no matter how attractive it sounds. No less an authority than Consumer Reports says that's a smart move, describing the billions of dollars spent on extended warranties as "money down the drain."

We're inclined to agree with Consumer Reports: The vast majority of extended warranties on small business technology products are a waste of money -- unless, that is, you're the company selling them, since vendors and retailers view extended warranties as a license to print money.

Even so, it's always helpful to understand why extended warranties are such a bad deal. It's also possible, at least in some cases, for an extended warranty to actually be worth the money. With that in mind, let's look at how extended warranties work, what they cover, and how to decide whether buying one makes sense.

Why "Extended" Warranties Fall Short

Most warranties on small business technology products are pretty straightforward. A laptop or desktop computer, for example, typically includes a one-year warranty that covers parts and labor. This kind of warranty will only cover manufacturer defects; if you drop the computer or spill something on it, you're out of luck.

Be prepared for a fight if it even looks like you might have caused the damage. If a repair center gets a laptop with a display problem and sees a crack in the case, you're probably going to take the blame -- and ultimately pay the price -- for causing the problem.

In most cases, you're also responsible for paying the shipping charges to get your computer to an authorized service center. And, of course, you'll have to find another computer to use while yours is in the shop, but warranties don't cover loaner units.

If it sounds like you could drive a truck through the loopholes in a typical manufacturer's warranty, you're probably right. That's why so many buyers leap at the chance to pay a certain percentage of the product's original price -- usually between 10 percent and 30 percent -- for an extended warranty.

What they get, however, is often very different from what they expected. Many extended warranties, for example, simply apply the same loophole-happy limited warranty terms over a longer period -- typically 1 year to 3 years beyond the original warranty.

Other extended warranties, however, add additional coverage that goes above and beyond a standard limited warranty. Features may include in-home service options, loaner units, or even a replacement option that swaps out a nonworking unit for a new one, free of charge. An accident protection plan, as the name implies, further extends the warranty to cover almost any kind of accidental damage to a device. You could (and some people have) accidentally soak, drop, or even run over your laptop, and it's still covered.

Naturally, the more coverage you get, the more you'll pay. Third-party, all-inclusive accident protection coverage, for example, can easily cost 30 percent of the product's original purchase price.

Can You Win the Warranty Game?

Extended warranties, like any kind of insurance, are all about the percentages; obviously, the company selling the warranty wants to make a profit on the transaction. In some cases, retailers pocket up to 50 percent of the price of an extended warranty, which explains why salespeople are trained to offer them whenever possible.

As many consumer advocates point out, it's a great deal for the vendor but usually a lousy one for the customer. For most products, the chances of a breakdown simply aren't high enough for an extended warranty to make sense. Many others are more likely to break due to "normal wear and tear," which is vendorspeak for all the stuff their warranty won't cover no matter how much you pay for extended protection.

Finally, you should know that even if a device does break, the typical repair cost may be considerably less than the cost of the extended warranty. A failed PC hard disk, for example, might cost $60 to replace, and you (or a knowledgeable coworker) can easily do the job yourself. That kind of repair makes a $100 extended warranty sound like a bad deal, especially if it means paying the shipping costs and going without a computer for six weeks while a repair center does the same job.

So, does an extended warranty ever make sense? Here are some factors to consider when deciding whether a warranty offers value to your company:

The warranty serves a clear business purpose. On-site service and product replacement options can get you back up and running far more quickly than shipping a computer or other device to a remote repair facility. If you value this level of convenience and predictability, then you should consider buying a warranty that includes these options.

The warranty provider has a stellar reputation. Pay careful attention to a vendor's reputation for honoring its extended warranty commitments. Research the vendor on user forums, through the Better Business Bureau, and on other consumer sites. After all, if you have to spend weeks fighting over a disputed claim, the time you waste will make the warranty more trouble than it could possibly be worth.

The device is especially vulnerable to damage. Desktop PCs tend to stay put, and when something does go wrong, they're easy to troubleshoot and repair. Smartphones and laptops, however, are prone to drops, spills, and rough handling, and when they break, they can be difficult or impossible to fix. That's why extended accident protection agreements are so popular with these devices, even though they may cost up to 30 percent of the original price.

Finally, remember that many electronic devices come and go very quickly these days. Do you really want to pay for an extended warranty on a laptop that you might consider obsolete in a few years anyway? And extended warranties on smartphones make no sense when you can renew your contract and upgrade to the latest technology every two years at little or no cost.

Above all, however, always remember that there's a reason technology vendors are so fond of selling extended warranties -- and it has nothing to do with making your life easier. This game is all about playing the numbers, and the odds are always stacked in favor of the house.