Friday, 1 February 2019

Extended warranties — also called service contracts — are everywhere these days.

Whether it's a few bucks for “scratch or break" coverage on a video game or several hundred dollars for an extended warranty on a laptop, it seems like every time you buy an item, the salesperson recommends you purchase some additional peace of mind in the form of an extended warranty.

And many people do. In 2016, Americans spent $40 billion on extended warranties. That's a lot of money for consumers to spend on something they might not ever use. And a lot of profit for the warranty provider when customers don't end up needing it. In fact, the high profitability of the extended warranty market has prompted some consumer protection groups and government agencies to take a closer look at the industry's practices.

However, according to warranty industry statistics, approximately one third of consumers purchase extended warranties, most commonly on exercise equipment, appliances, and electronics. The industry asserts consumers who purchase extended coverage are more satisfied with their purchases.

Consumer protection advocates typically discourage consumers from purchasing service contracts. Consumer Reports strongly advises consumers to steer clear of extended warranties, and the Federal Trade Commission(FTC) suggests they might not be worth the expense.

Most agree, however, that consumers should take the time to ask questions and gather information when making a decision about purchasing a service contract. Here are some of the issues to consider:

How often do products fail?

According to a 2018 Stanford University Study, many consumers purchase extended warranties because they overestimate how often products fail. The study suggested if consumers were given actual data about how many products required repairs not covered by the factory warranty, they would be less likely to purchase the additional coverage.

For example, let's say you've decided to buy a new $1,000 washing machine and the salesperson suggests you spend $150 for an extended warranty. Sounds tempting. But what if the salesperson told you for that particular model, only one out of every 100 machines required service not covered by the existing factory warranty. Would you still buy the extra coverage?

What coverage do you already have?

Thanks to technology and consumer demand, most appliances and electronics are pretty reliable these days. And consumers have much more access to product information and reviews, which can help them purchase higher quality products. What's more, most products come with factory warranties, and many manufacturers or retailers will repair or replace a faulty product because it encourages loyalty and reflects positively on their business.

When making a purchase, it makes sense to take a few minutes to understand what the factory warranty covers and what the store's return policy is. In addition, many credit cards offer cardholders purchase protections. Again, reading the fine print and understanding what protections you have can help you make an informed decision about purchasing additional coverage.

How much do repairs cost and what does the extended warranty cover?

Consumers have a tendency to think repairing an item is always expensive, and this fear can make an extended warranty very appealing.

Let's go back to the washing machine example. The cost of the extended warranty was $150, which is probably more than a service call from a reliable washing machine repair person. And if the repair is minor — say a belt replacement — the cost could be very reasonable.

But the extended warranty would cover all those costs, right? Not necessarily. Many warranties have fees and exclusions that could result in your facing some out-of-pocket expenses even after you've forked over the $150 for the warranty.

Again, it's important to do some research before you purchase a product to understand how reliable it is and what repair costs might be. If you're tempted to purchase an extended warranty, make sure you're clear about what the warranty actually covers.

The Bottom Line

Manufacturers and retailers sell extended warranties to make a profit, not necessarily to provide a valuable service to consumers. To help give you peace of mind when making a purchase, it's smart to do some research so you can be confident you're buying a quality product that will not need repairs for several, if not many, years.

If you're still considering the extra protection of an extended warranty, take some time to familiarize yourself with the factory warranty, the store's return policy, and the details of the coverage included in the service contract.

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