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An extended warranty is exactly what it sounds like. For a fee, the warranty that you normally get with a product is extended for a longer period of time. Extended warranties differ drastically from one to another, but they are all based on this same concept: pay more up front, for a longer period of protection against failures or problems down the road.
Extended warranties are heavily pushed, particularly by vendors of PC systems and other electronics products. They are sometimes offered reasonably, by salespeople suggesting them as an option, which is fine. But they are also sometimes sold using fear, with the unscrupulous making it seem like without an extended warranty, you are courting certain disaster.
There's an innate skepticism in me that results in a few rules of thumb that I use to evaluate the different things I encounter in the world. One of them, TANSTAAFL, I have discussed elsewhere. Here's another: the more strongly someone tries to sell me something, the more I suspect that I don't need it. It's not always true, but it is true a surprising percentage of the time. And it is generally true of extended warranties.
Consider: a manufacturer provides a warranty as a show of confidence in the products it makes, and to compete with other manufacturers. Why does a vendor try to sell an extended warranty for a product that already has a warranty? I suppose you might think they do it as a noble service to their customers. Unfortunately, you'd be incorrect. :^)
The reality is that most extended warranties are sold because they are big money makers for the companies that sell them. In some cases a vendor makes more on the warranty than they do on the PC! The companies that offer them are not fools; they price them based on careful analysis of how often failures typically occur, and what repair costs are. These warranties are sold enthusiastically because they are very profitable.
Computers are, on the whole, pretty reliable equipment, and they also drop in value very rapidly. The $150 you spend on an extended warranty today may seem small compared to the cost of a $1,500 PC, but in say two years when you go to use it, that same PC will probably be only worth about $500--or less. And you have to have the item fail twice in most cases before you are really ahead with the extended warranty, compared to just paying for out-of-warranty service. Remember that most PC failures occur within the first 90 days of using the machine.
As a result, extended warranties are, for the average person, not a good use of funds, and I don't generally advocate spending money on them. In most cases, you are better off saving the money and setting it aside in case you need a repair, or spending it on upgrading your hardware in the future, or spending it on a new PC down the road. (Or spend the money on a higher-quality PC! Better equipment is less likely to fail in the first place. Consider this an ounce of prevention instead of an ounce of cure.)
However, I won't just make a blanket statement that you should "never get extended warranties". There are situations where they make sense:
There is one extended warranty that I strongly do recommend, and that's the free extended warranty! There are some credit cards that will automatically extend the manufacturer's warranty if you use them to buy the product. It's pretty hard to argue with that (though that's assuming you don't end up paying out a ton of money in interest on the card--if you do, then it isn't free any more.)
If you do decide to go for an extended warranty, well, you know the drill: be sure to read the fine print. Find out what the warranty includes and excludes specifically before you agree to buy it. Often the vendor isn't actually providing the warranty coverage, but actually reselling it to another company, which may be geographically distant or may have very unfavorable policies.
Be especially wary of very long-term warranties; some are offered that go out five full years. If you generally keep your PC technology current you probably won't be using that PC for five years, and even if you are, its value will drop to under 20% of its purchase price after three. And it only gets worse from there. Buying an extended warranty on any product that already has a three-year warranty is almost certain to be a waste.
Finally, remember that a warranty is only as good as the company that sells it. If you buy a five-year warranty and the company goes out of business after 18 months, you may well find that the other 3.5 years of warranty coverage is now gone. There have been some high-profile cases of large extended warranty providers going "belly up". Don't assume that the warranty is provided by the company that sells the policy: check to see who the underwriter is and check that company out.
Note: Another problem with
extended warranties is that many companies are very eager to sell them, but not nearly so
keen on honoring them. See this section for
assistance if this happens to you.