Hold off extended warranties until you read this

COMMENTARY Some people find purchasing gifts the scariest part of the holidays -- trying to find the right fit for Aunt Mildred or Benny, the annoying office politician who sits two spots down from you. But no, these are minor travails. The real challenge is deciding whether to get the extended warranty.

You know the drill: bring something to the register, get ready to pay, and the salesperson asks if you want to extend the protection on that Wi-Fi-enabled mixer for the kitchen. The pressure's on. On one hand, retailers would love it if you always bought protection, whether you needed it or not -- it's a great boost to their profits. At the same time, those who say never buy the extended warranty are a little too quick and general in their advice. We talked with a number of experts to put together some advice on when, and how, to purchase an extended warranty.

Legalized betting, just like insurance

What bothers many people about extended warranties is that they are a bet by the retailer or manufacturer that chances are you won't need them. They act like insurance companies. The consumer pays a certain amount and the store or vendor essentially bets that, on the average, there's a low enough chance of people using the warranty that they're a way to effectively raise the price of a product. Here's how James Talaga, a professor of marketing at La Salle University puts it:

Similarly [to insurers], companies offering extended warranties would also make profits if the amount they receive in payments is greater than the amount that they pay out. So, if a firm offering an extended warranty has done its math well, when selling an extended warranty for $100, the firm would hope to pay out somewhat less. What this ultimately means is that the average purchaser of an extended warranty will also incur an average loss of somewhat less than the premium. This is where the issue of a person's risk tolerance comes to play -- if a person has low risk tolerance, they would be more likely to buy the warranty; if they have high risk tolerance, they would be less likely to buy the warranty.

You could also call it legalized betting. The question is how risk averse you should be. That depends on many factors, including the type of product you've purchased. "Often the cost of a single service call for a major appliance is enough to justify the cost of the extended warranty," says David Urban, executive associate dean and professor of marketing at the Virginia Commonwealth University School of Business.

Automobiles have become far more reliable over the decades. Ronald Montoya, a consumer advice associate for automotive website Edmunds.com, says that he bought a car last year and didn't bother with an extended warranty. "I figured I'd deal with a problem if it showed up," he says. Consumer electronics? A slightly different story.

Consumer electronics ain't what they used to be

If you thought that electronics products don't seem to be as hardy as in the past, you'd be right. "Today's TVs don't have the longevity of [old-fashioned] CRTs," says Michael Jay Geier, author of How to Diagnose and Fix Everything Electronic. (Disclosure: he's an old family friend.) The set that lasted long enough to become a social embarrassment to the owner's children might last only three to five years now. That's become a problem. "You're getting to the point where people are buying [flat-screen TVs] and want to keep them for a decade, and they don't last that long."

Bob Minhas, president of AlphaStarr Technical Solutions, a "technical concierge" business near Toronto, agrees that products today aren't built to last. Part of the problem is the increasing complexity and simultaneously shrinking size of electronics. There's more heat, more stress and more things that can go wrong. Although Minhas doesn't sell the gear nor the protection plans, he does suggest to his customers that they buy the extended warranties, and a good thing to hear him tell it. "I have a lot of clients that do [eventually use the extended warranty]," he says.

It depends on the type of product

Deciding on an extended warranty means balancing the chance of something going wrong and the ensuing repair cost versus the price of a new product. For example, Geier will consider an extended warranty on an expensive laptop if the extra cost is less than 20 percent to 25 percent of the original product expense, "but not for the $395 special at the big box store."

With the pace of change in electronics, you might want to get a new-model smartphone the next time your account is up for renewal. In that case, an extended warranty might not make sense because, on the average, you'll be getting rid of the product before you can use the protection.

Another consideration is whether you might have coverage you didn't realize. If you purchase with a credit card, ask your issuer about extended warranties. Many card issuers will add an extra year of warranty onto the manufacturer's warranty for products you buy with a credit card. If that gets you to two years of coverage, it might be enough for free (assuming that you aren't racking up the interest rates by carrying a balance, which could quickly negate any advantage you had).

Some up front research can also help you decide whether buying an extended warranty will make you save or lose money, because problems can even vary by model line from the same manufacturer. "For instance, laptops have been subject to issues with video chips in them running so hot that the solder joints weaken and [the chips] start coming off the board," Geier says. That would mean replacing the entire board, because almost no repair group has the very expensive tools necessary to fix the complicated assemblies. So a loose solder joint might require an entire new motherboard at a cost of hundreds of dollars.

Dos and don'ts for buying extended warranties

Sorry, there is no hard and fast rule to tell you what to do. But here are some pointers on how to be smarter about buying extended warranties and some things to watch out for:

Check the coverage dates. Many retailers will sell extended warranties that overlap with the manufacturer's warranty, so that "additional" three years of coverage might actually be only three years in total. Then again, if you can drop a problem product at a retailer and not deal with shipping costs and getting to a post office, you might see the extra cost as a convenience fee.

Scrutinize what the warranty covers. If you're prone to damaging products, unless the extended warranty covers such damage, it's a waste of time. In cars, it's common for some extended warranties to apply only to power-train issues, which means the engine and transmission. An electric problem that wasn't part of the engine would be an out-of-pocket expense for you.

Is shipping involved? If you have a big flat-screen TV out of warranty, who will unmount it from the wall, crate it up and ship if off, if those are the warranty terms? Understand whether you can drop a product at local spot or if you must do everything via mail or a shipping service.

Know who provides the service. Who is responsible for actually performing any repair? The older an electronic product gets, for example, the harder it becomes to find replacement parts. You want an extended warranty that will offer a replacement if repair is not possible for whatever reason.

Do you have to buy now? This is of particular interest in automobiles. Montoya says that you can generally get the auto manufacturer's extended warranty any time up until the original warranty expires. That should give you some space to see whether the car shows signs of having a citrus fruit as a parent, which lets you make a more-educated, less-rushed decision than right at the time you buy the vehicle.

Try to negotiate. This is another trick that works in the car industry but that you might be able to do with other types of products, especially more expensive ones. Extended warranties are high margin add-ons to a sale. See if you can get the salesperson to offer it for less to close the deal.