Deal or No deal to extended warranty
Introduction
Warranty is a written guarantee given to the purchaser of a new product by the manufacturer, usually specifying that the manufacturer will make any repairs or replace defective parts free of charge for a stated period. Extended warranty is providing service contract for defects that could arise after the manufacturing warranty run out. An extended warranty is coverage for electrical or mechanical breakdown. It does not cover peripheral items, wear and tear, accidental damage, or any consequential loss. The guarantee is to cover the cost of repair and may include replacement if deemed uneconomic to repair. In retail consumer products, extended warranties cost 20% to 30% extra of the product price.
The main reason companies sell extended warranties is because of the huge profits. Consumer Reports magazine about 50% to 60% of what a department store makes comes from extended warranties. Combine that with the fact that an estimated 80% of consumers who purchase extended warranties never make a claim and it’s clear how these service contracts can equal huge profits for retailers. The price you pay for an extended warranty is determined by calculating the average maintenance and repair cost of a given item (say, a washer) over the duration of the warranty (say, 5 years), and then adding an amount for “profit” to that figure. The amount of profit can vary considerably, but can sometimes be multiples of the expected repair cost, i.e. the warranty on an appliance with an expected repair cost of $70 might be sold for $250.
Is it worth it?
Consumers do not realize that extended warranties are not offered to the consumer’s benefit. For instance, when an auto warranty is offered through a dealership from the manufacturer, repairs on the vehicle are reimbursed at a lower negotiated rate. Some mechanics might fraudulently attempt to defer the needed repair until the warranty has expired so that the ordinary (higher) shop rate will apply.
David Butler of the Consumers Union says, “The extended warranty is definitely in the best interest of the company, but isn’t often in the best interest of the consumer.” He adds, “The Company is much more likely to profit from the extended warranty than the consumer is.”
Extended warranties are not a good investment. Consumer Reports, the Better Business Bureau, Canadian consumer organizations, and the Federal Trade Commission as well as the chartered accountant all are against purchasing extended warranties. I believe they are right about it, I think not all extended warranties are a good buy. That is my personal viewpoint and that is what all the consumer watchdogs are saying. “They’re foolish things to buy”. “They are an impulse buy”. You don’t go into a store, thinking you’re going to buy an extended warranty. The sales person suggests it. Don’t be afraid to say NO. There’s nothing worse than being pushed into buying something you don’t want.
Does extend warranty buys you peace of mind?
Every consumer should ask themselves a question before they buy a extend warranty does the warranty actually buys you is the peace of mind? It’s also important to realize that most breakdowns for reasons of “manufacturing defects” occur during the first few months of use– and thus are generally covered by the manufacturer’s warranty.
It seems that these days you can get an “extended warranty” on anything from a blender to carpet. In deciding whether to buy an extended warranty or not, is a risky process. The salesperson makes the extended warranty sound like a hassle-free insurance policy. Even if the extended warranty does sound good, follow this advice:
Don’t believe everything the sales staff tells you:
Sales team often scam consumers by saying that a warranty would cover damage if dropped. However, the warranties had a clause that excluded repairs due to “abuse or misuse.” They are going to make it sound like a great deal. Instead of believing the sales team, ask to see a copy of the extended warranty and read it thoroughly. Don’t accept a company brochure as a copy of extended warranty information. Ask to see the official warranty. Make sure you understand everything in the extended warranty and don’t expect anything more than what’s written in the warranty.
Analyze the extended warranty:
Are all parts covered for repair or only certain ones? Remember that some extended warranties will cover the parts least likely to break down. Is the cost of parts and labor covered or just parts? What is the period of the extended warranty? When does the extended warranty start? Immediately or after the manufacturer’s warranty expires. (It’s best if it starts after the manufacturer’s warranty.) What company is responsible for the warranty? If this information isn’t readily available, hold off on buying the warranty until you can get it. You may be able to find full details of the warranty online or by contacting the head office of the company.
Ask the sales person
1. What happens if the extended warranty company goes out of business?
2. Is there a back-up insurance policy? Who does the repairs? Is it done in-house, sent away to another third-party repair centre, or sent to the manufacturer?
3. Do I have to buy the Extended Warranty now or is there an extended time where I can purchase it?
Finally, buyers should be aware of the way sales representatives are paid. They are on salary (not a very good one) and margins are so thin that they do not get commissions on sales. But they do get a commission on extended warranty sales. That is the reason they try to tell you so many tales of woe about what might go wrong. Buy the item and leave. Yeah, you might lose on an individual item. But if you ALWAYS turn down the warranty, in the long run you will come out as a winner.
Learn from experience
Lesson 1: What you think you bought isn’t always what you get
My understanding of extended warranty was completely different (i.e. warranty would be covered for the entire four years, regardless of the number of repairs) then what the sales representative explained things. My understanding was not correct. As a fact, I had purchased a one-time replacement or refund contract that expires after four years or when I made a claim, whichever came first. That wasn’t exactly clear in the Protection Plan terms and conditions. As for the service plan description that came with the original receipt, it states that “The Protection Plan….starts on the date of purchase and extends for the life of the plan.” Thus unit was covered either way, but this important difference of interpretation had consequences.
Lesson 2: Keep everything that came with the product or you will pay a price
Next I learned that it’s not enough to return the defective unit: One must bring in all of the various bits and pieces that came with it including original box and all cables? If not, deductibles would apply. For example, failure to produce the original “manual” would result in a penalty of $12.03.
People must remember that they have right to goods that work, and to choose between a refunds, repair, replacement, or part refund if they are faulty. Retailers must provide these rights anyway. Consumers also have new rights to cancel the warranty within 45 days and get a full refund, if they have not made a claim.
Is extended warranty worth it? In most cases, the answer is “No”. Therefore, my verdict on this issue is No deal to extended warranties.
Extended Warranty Solution, Warranty Week, July 25, 2007 http://www.warrantyweek.com/archive/index.html
What is an extended warranty? CBCnews, finance, warranties, November 12, 2002 http://www.cbc.ca/consumers/market/files/money/extended_warranties/what_is.html
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