There?s an episode of The Simpsons that went something like this:

Homer gets really intelligent.

Near the end this guy hits Homer on the head to dumb him down. Each
time he hits him he says something. Eventually Homer says, ?Extended
warranty? Great idea!? Then the guy says that Homer?s back to normal.

My question is, what?s so bad about extended warranties?

Dear markabe-ga,
 
It is argued that extended warrants do not make financial sense.

I do not know which country you are situated in, but these are some
aspects of the debate from the UK.
 
Initially you are covered by consumers rights and manufacturer?s
guarantees. Why pay for protecting what you already have?
Paying for an extended warranty may cost far more than it would cost
to repair the item; or it may be cheaper to dispose of the item and
purchase a new one.
Some staff receive a commission for selling you an extended warranty.
Their advice is not to be considered independent and reliable.
Will the extended warranty be valid if the company goes bust?

This is from a page of advice on warranties from the UK?s Office of Fair Trading

?What is the likely cost of repairing your appliance?
This will vary ? a recent OFT survey found that the average washing
machine repair was between £45 and £65, and the average TV repair
between £35 and £55.
So if you pay £150 for a five year extended warranty on a £300 washing
machine, your machine would need to break down around four times in
years two to five before you gained anything.
This is worked out using averages, it can cost more or less to have
your machine repaired.
What is the cost of a new appliance compared with the cost of an extended warranty?
It may be cheaper to replace the appliance if it breaks down outside a
manufacturer's guarantee period rather than buying an extended
warranty.?
http://www.oft.gov.uk/Consumer/Your+Rights+When+Shopping/Extended+warranties/extended+warranties+-+questions.htm


The UK?s Competition Commission conducted an inquiry into extened
warranties and found the following:

"    ? almost all EWs are bought at the point of sale. Few consumers
consider EWs before their purchase, and have little opportunity to
consider alternatives in the shop;

    ? EWs on offer at the point of sale are nearly always from one
provider, usually the retailer;

    ? there is generally no information available on the reliability
of electrical goods or the likely repair costs;

    ? there is generally no information available at the point of sale
on the prices, terms or conditions of EWs from alternative providers."
http://www.dti.gov.uk/consumers/Fact%20Sheets/page10720.html

Citizens Advice Bureau on extended warranties.
http://www.citizensadvice.org.uk/winnn6/index/pressoffice/press_index/press-050407.htm

I hope this answers your question. If it does not, or the answer is
unclear, then please ask for clarification of this research before
rating the answer. I shall respond to the clarification request as
soon as I receive it.
Thank you
answerfinder

Great research, and many thanks for the very helpful comments.

Some years ago, I bought a fridge (or something) from a very
well-known High Street store.

On that occasion, I collected the fridge from the rear entrance to the
store and, for some reason, I had to go through to the front.

On the door leading to the front was a large notice reminding the
salesmen that the business made more money from selling Extended
Warranties than from the products themselves. It also urged salesmen
to do their damnedest to do the biz with attractive commission
incentives.

It was a very valuable lesson.

When I bought my car, the warrantee was 36,000 miles/3 years.  The
salesman and eventually the manager tried desperately to get me to buy
the extended warranttee for $1000 (100,000/6 years), but I refused
over and over again.

When I returned to my bank where I financed the car, they offered me
the same warrantte (100,000/6 years) for $550.  Looking back at it, I
wish I had taken that deal.  The salesman of course would make a nice
peney from the warrantee, but I think the bank's motives are
different... I am more likely to continue paying off my car if it is
in good running condition, so they are happy to offer a cheap
warrantee to me (probably at the real average cost of repairs over the
6 years).

You might want to do a search on the "bathtub" failure curve of
appliances and electronics.  Basically, think of a graph of time on
the X-axis and rate on the Y axis.  The defect rate starts high and
gradually drops over about 3 months.  From about 3 months - several
years, the failure rate is very low and very stable.  After some long
period of time, say 5 years, the failure rates starts to rise again as
the product reaches the end of its expect lifecycle (different for
each one).  This gives the plot the appearance of a bathtub.  Now
consider the situations:

0-3 months - you are covered by the manufacturer.  Store warrany is useless.

3 Months - Several years - low defect rate.  Defective products tend
to show up right away, not months into use.  Store Warranty in effect,
but it'ss a bad value because of the low defect rate.

Several Years+ - defect rate creeping up but oops, your store warranty has expired.

Also, you have to take into account the fact that even if there is a
defect during the useful life of your warranty, will the store
faithfully honor the contract? It's not as hassle-free as you may be
lead to believe.

As probonopublico mentioned, these things are a huge profit center for
the companies, and it's precicesly because it's such a terrible value
for the consumer.

Finally, If I remember correctly the Simpson quote is "Extended
Warrany? How can I lose!"