Warranties 101

Studio 5 Contributor and Consumer Educator, Teresa Hunsaker with the USU Extension Office shares important warranty advice.

Warranties, you have been offered them a million times. Are they worth it?

As consumers, when we buy something, we want it to last. If it doesn’t we want the company that made it to replace or fix it. But anymore that may be a challenge, especially without having purchased an extended warranty. And to top it off, vendors have cut the length of standard warranties for numerous products or parts.

Generally warranties fall into two categories: Standard Warranty—one that comes with many products automatically, mostly with electrical parts or working components; and Extended Warranty—sometimes called a service agreement, a service contract, or a maintenance agreement.

Standard Warranty

This standard warranty guarantees your purchase to be free of defects in material and workmanship from the date of shipment. If a product fails within the standard warranty period, generally the company/manufacturer will fix or replace the item at no charge to the customer. However, this may take a considerable amount of time and hassle—all while you are out the product while being repaired or replaced. It is important for you to know exactly what is covered. In fact, did you know that most appliances and electronic devices come with a one-year warranty from the manufacturer already? Some products, including washing machines and dishwashers, autos, guarantee specific parts for even longer.

Extended Warranty

The extended warranty is a prolonged warranty offered to consumers, for a price. The extended warranty may be offered by a warranty administrator, the retailer, or the manufacturer. Extended warranties cost extra and for a percentage of the item’s retail price. In retail consumer electronics, extended warranties cost 20% to 30% of the price, and give sales associates up to 15% commission at some retailers. Occasionally, some extended warranties that are purchased for multiple years state in writing that during the first year, the consumer must still deal with the manufacturer in the occurrence of malfunction. Thus, what is often promoted as a five-year extended guarantee is actually only a four-year guarantee. Often consumers don’t take into account the replacement cost of the product they’re buying when they’re considering a warranty. Especially with low-end consumer electronics, it’s very often cheaper to replace a product after a period of use than try to have it repaired.

It is important for consumers to read and understand the terms and conditions offered at the point of sale. The value of extended warranties lies behind the organization promoting and selling them. Consumer advocate groups advice only buying extended warranties offered by the factory that built the product and only if you can buy them at cost.

Oh, and did you know…that most of these plans are backed by an insurance company that promises to repair or replace the covered item should it break or malfunction, that the terms vary widely, and in terms of service, most warranty providers use third-party contractors to repair broken items, and consumers do not get to choose who performs a covered repair? Many policies do not cover accidents or normal wear and tear — the most common causes of breakdowns in common household goods.

So, what sounds like a good idea at the time, and while standing at the checkout stand, may not be worth it after all. Since extended warranties are claimed so rarely, the profit margins on them run as high as 40% to 80%, according to Consumer Reports finance editor Marlys Harris. This can really boost a company’s profit. During 2004, nearly 100% of Circuit City Stores’, and 50% of Best Buy’s operating income came from extended warranties, say analysts. No wonder they are promoted so widely.

One report indicated that 37 percent of 2000 folks surveyed said they don’t buy extended warranties, mainly because they think the plans are a rip-off, though a large portion also believes they’re just too pricey. Most of them haven’t regretted skipping it—only 23 percent of that group said they wished they had one when products purchased after the standard warranty expired.

Some people think that if a product is going to fail, it will do so soon after purchase, so the likelihood that you’ll need coverage beyond the standard term is low. If a product can make it through the first year, chances are good it will continue to function well for the next four. Typically you pick up any flaws in manufacturing in the first 90 days; it flattens out soon thereafter, then rises again as the product ages and is used more.

So, the bottom line? Are you willing to pay a fair amount extra for peace of mind? Only you can decide that for each of your particular purchases and situation.

Keep in mind, the Consumer Reports National Research Center has long advised that extended warranties are a poor deal for almost every product.

Resources for this article:

Consumer Reports

Consumer Affairs— ww.consumeraffairs.com

Read more: Extended Warranty Rip-Offs at SmartMoney.com

Washington Post, October 2006.

Better Business Bureau

Federal Trade Commission

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