Extended Warranties Worthwhile or Waste of Money?
If you have purchased a car, electrical products or expensive electronic equipment such as a large LCD screen, you will have been badgered to buy an extended warranty for the items purchased. There is a lot of divergent view about whether they are worthwhile or not.
Many people say that they are an absolute waste of money, and are 'money for jam' by the retailers. Most sales staff have targets for selling extended warranties and are offered bonuses for selling them.
On the other hand, many people argue that it's like any insurance. You are covering the risk that the item will fail, and ruin your investment in the goods, especially as repairs can be very expensive and time-consuming.
Some firms offer full replacement of goods within the warranty periods with free delivery and installation in your home within 24 hours of making the claim. But you need to read the fine print about what is covered and for what period of time.
So how do you decide whether extended warranties and worthwhile or not, will they deliver what you expect if you make a claim, and what alternatives are available?
This article will help you answer these questions and help you discover what you need to know before making the decision. It does not deal with auto warranties, but provides all the pros and cons of extended warranties for other consumer goods.
Don't be forced into a spur of the moment decision when the offer is thrust in your face after buying new product. Read on to be prepared.
How Do You Decide Whether an Extended Warranty is Needed
There are many things to consider when making this decision and it should not be done in a rush at the time you make the purchase. You need to do your homework. There are some common sense things to consider. Like any insurance you only need it, when you need it! It is a matter of assessing ALL the risks in a rational way. This includes not only the risk of losing money if the items break down, but also the impact this may have on your lifestyle, business or activities. Can you really afford to be without these items while they are being repaired or replaced How likely are the goods to break down over the period covered by the extended warranty? Some of the things to consider are:
Expense of the Item - Obviously the more expensive the item the greater the justification for insurance. Price of the product matters: If you're buying a $90 DVD player, a $35 warranty makes no sense at all. Even a far cheaper extended warranty may not make sense if the manufacturer has a good warranty on the product for free for the first 12 months or so. Check if a more expensive model comes with a better manufacturer's warranty. It might save you money to actually buy a more expensive in the long term. It may be more reliable anyway.
However, if you are about to spend $7000 on a huge plasma or LCD TV, the extended warranty becomes much more sensible, especially if it includes a service contract. When you're spending that much, a small percentage could be worth it for the peace of mind and reduced chance of down time. Just remember, just about every product is under warranty anyway, and there is little likelihood you will require the service contract within the time period allowed.
Reliability of the Item - Certain goods are much more reliable than others and this reliability has change. Refrigerators and washing machines are generally quite reliable. The old cathode ray tube televisions used to be very unreliable, then they became very reliable. The newer versions, such LCD Television Screens, appear to have varying reliability, with many models having power supply problems and loss of pixels. You only have to go to your local electronics repair shop to see the line up of goods waiting to be repaired. While you are there, ask them about the service record for the item you are thinking of buying and also get their opinion on the most reliable models.
Quality of the Item - 'You get what's you pay for'. Reliability will vary with the quality and price you pay for the item. Goods from established brands are likely to be more reliable. Cheaper goods cost less to replace, but may be very unreliable. A warranty may cover you for the inherent unreliability of an inferior product, but when you consider the cost of the warranty and likely shortened life of the item it may be better to buy a more expensive item from a reputable manufacturer that has a slot in stake in protecting their brand and reputation. Of course the repairs are likely to be more expensive beyond the basic warranty period. The standard warranty provided by an established brand may be much better anyway.
Service Record for the Item - Do some research to check how frequently the item being purchased has failed and the effectiveness of the repairs and replacement under warranty. Read the reviews and search for service history and complaints.
Consider Down Time and Inconvenience Costs - Can you really afford to be without the goods while it is being repaired? It may take several weeks to get your faulty item to the repair shop, get the repairs started, wait for parts and get the item delivered back to you. All that time lost without the use of the item may be more damaging than the actual cost or the repairs. If a computer or even a monitor is vital for your home business, where replacements may not be available, it may be worth the extra expense especially if the warranty offers a 24-hour drop-in and install deal. But check the fine print on these offers. It is generally worthwhile keeping your old equipment after you upgrade, just in case. It may even be worthwhile buying a reconditioned old monitor as a backup.
Take Time to Read The Fine Print Carefully So You Fully understand the Deal, the Exceptions, the Costs - including Pick-up, Delivery and Service Time Issues
Always take the time to discover what the extended warranty covers – don’t rely on the salesperson’s knowledge. Your right to repairs or replacement of a faulty item could be covered under the consumer protection laws that apply in your area.
Study carefully the extension to the normal length of time they cover. Most items have a built-in manufacturer's warranty that covers malfunctions and product flaws. These usually last for one or two years. But check what they cover, and what they don’t cover and how the default are rectified, and who does what and when.
Be careful you understand the actual period of time covered by the extended warranty –what you are paying for. For example, a three-year extended warranty may really only cover the last year, because the first two years are covered by the free manufacturer's warranty. What is covered and how the faults are repaired are done, may be very different.
Quite often the period of time covered for various components will be different, so check the details.
Statistically speaking, a product is much more to fail because of a faulty part either early on, within the one or two years of the free manufacturer's warranty. Faults due to parts simply wearing out may occur well after the extended warranty has expired. You need to take into account the time you expect the product will last before it is out of date.
Many products such as computers and TV screens will probably be out of date within 2-3 years anyway. There are always new developments such as 3D etc. For these items it may better to consider leasing options, because leases ensure you always have the latest up to date equipment.
It is estimated that retailers can make as much as 40-80% profit from warranties. Why? because most goods do not fail during the warranty period.
Service Contract versus Extended Warranty
Quite often the people selling the extended warranty will refer to it as a service contract, but it is important to be sure you understand the difference and what the contract you are paying for actually covers. A warranty generally covers defects in manufacture or faulty parts that fail sooner than expected. It generally only covers particular parts and the cost of replacing them. It does not cover the service required to rectify general malfunctions or other parts. It also does not cover accidents or any misuse on your part. Generally if an accident happens, or you do something silly you won’t be covered. Likewise it does not cover normal wear and tear.
On the other hand, a service contract can be similar to what you get with some new cars. It is in the manufacturer’s interests to protect their brand and their warranty. So that will offer to change the oil and do all the routine maintenance jobs and safety checks for free. Some retailers offer service contracts on other goods for similar reasons – to do regular checks and maintenance to end=sure the product keeps running well and to make little repairs before they can develop into something more serious.
Pay close attention to the fine print in the warranty or service contract. Like any insurance it's in the store's and manufacturer’s best interest NOT to spend money repairing your item. They will have had legal and technical people working for years devising various loop-holes and escape clauses to avoid covering the components that are most likely to fail
What are the Extended Warranty Pros?
► For very expensive and difficult to replace items, and items that won’t get out of date quickly, the extended warranty may be justified, especially if you are highly reliant on the item. If you are going to spend several thousand dollars on a huge LCD TV, that is a new model and untested in terms of fault risks, it may be worth the extra few hundred dollars provided you know exactly what is covered. Generally the more expensive an item is, the most costly it is to repair including parts and labor. So it may make sense to invest to cover your replacement risks.
► If you do some research and notice the product has a reputation for faults, perhaps shared by other manufacturers and there is a good track record for honouring the warranty, it makes sense to cover yourself.
► If you run a business or really depend on the item and can get a reasonably priced 24 hour drop in and install replacement deal, the warranty may be justified.
► Purchasing extra coverage for a new cell phone is usually justified, as you may not be able to survive for very long without it and you can generally get deals to cover various accidents such as dropping the phone as well as manufacturing faults. Extended warranties for cell phones may also cover lost or stolen phones and water damage.
► If you decide you need an extended warranty, try to purchase it directly from the manufacturer, not from the store as it is generally much cheaper and better defined in terms of what is covered and the fine print.
What are the Cons of Extended Warranties
► Basically extended warranties are very profitable for those offering them. Why? Because very few people may claims, or make claims that can’t be excluded by the fine print. Secondly, they only cover an extended period of an extra 12 months, with the original warranty covering the first one of two years.
► Although not widely known, many credit card companies automatically give you an extended warranty on an item you purchase using their cards (American Express Visa and Mastercard). Check you cards for coverage. Usually to qualify for a repair or replacement, you only have to submit the receipt and the expired manufacturer's warranty.
► Carefully consideration the cost, and read the fine print about delivery costs etc. . It may be worth taking a tiny risk.
► If you buy top quality goods from reputable manufacturers you may have less need for an extended warranty as they are likely to be more reliably and have better manufacture’s warranties. Many products are inherently reliable such as refrigerators and lawn mowers. The risk of a personal computer breaking down the in first three years may be about 40%, but you may want to replace it every second year anyway. If the product is unlikely to fail after the initial manufacturer’s warranty period, the extended warranty may be unjustified.