When you're buying a car, a home or an appliance, more than likely you'll be pressured to buy a service contract, or "extended warranty," as part of the purchase. The warranty, you'll be told, covers repairs not covered by the manufacturer's warranty, or will extend coverage after the manufacturer's warranty expires.
But is this really true?
Are extended warranties a good buy? Companies selling them insist that they are, claiming they save consumers hundreds, even thousands, of dollars in costly repairs. But consumers filing complaints with ConsumerAffairs.com tell a different story.
Judging from the seemingly countless complaints we've received, there are five good reasons why consumers shouldn't buy the extended warranty.
1. They Usually Cost More Than They're Worth
"I went to Office Max and bought the cheapest telephone they had, which was $9.95," said Lucille, of Fairfax, Virginia. "When I got to the counter, the clerk tried to sell me an extended warranty for $5.95. I told him I'd take my chances."
The example above may be an extreme case, but very 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.
We have become a "disposable culture" in recent years, as manufacturing costs have dropped and labor costs have risen. That concept is alien, however, to many Americans who grew up in an era when consumer products were expensive, well made and relatively easy to repair. It makes today's senior citizens especially vulnerable to extended warranty pitches.
But if extended warranties are not a good deal for consumers, they are a very good deal for the businesses offering them.
Industry sources put the profit margin on consumer electronics extended warranties at between 40 percent and 80 percent. The November 2004 issue of Warranty Week reported that Dell's revenue from extended warranty sales was actually overtaking its spending on warranty claims, and Gateway increased its warranty revenue to $33 million while decreasing its warranty costs to $15 million.
Wal-Mart recently announced it is getting in on the action, increasing its offering of extended warranties on consumer electronics.
But the relatively high cost of extended warranties is not the only reason to avoid them.
2. Warranty Work May Be Unreliable
The first thing to understand about buying an extended warranty is that, should something go wrong, the company holding the warranty, not the consumer, will determine who does the repair. More often than not, they will use a subcontractor that you wouldn't have selected on a bet.
Tim, of Phoenix, Arizona wrote to ConsumerAffairs.com in late August to tell us of his ordeal with American Home Shield as he tried to repair his broken air conditioner.
"The unit failed on Friday evening, when it was 109 degrees outside. I contacted AHS and was told their techs do not work on the weekend. I suggested that I had an alternative repair technician and would like to use them. The contact person said to go ahead and get it fixed and I could turn in my receipt for reimbursement according to their policy. I got the unit fixed on Saturday morning, with a total bill of $647.50."
But Tim said his claim was denied. It turns out the warranty did not pay for work done by another repair contractor. When consumers are free to shop for the best service or repair, they usually get the best results. When they must use technicians selected by the warranty holder, the result is often frustration.
Consider Steve, of San Clemente, California's dilemma:
"We purchased a computer from a Best Buy store. With sales pressure, we purchased an extended warranty for $250.00. For the past several months we have had problems with the computer. The warranty people have sent out a total of six computer service techs and none have been able to resolve the problem. Now Best Buy is deciding whether to send a seventh guy out to fix the problem."
Circuit City makes a selling point of its in-home repair service on large screen TVs. But scheduling the service is not always easy. When Amanda, of Ann Arbor, Michigan began to have problems with her 32-inch TV, she discovered getting her set repaired wasn't going to be that easy.
"I called to make an appointment for a technician to come to my house, or for me to take my TV to a local Circuit City. I was informed that the only times that the technicians could come to my house was during the day on Tuesday, Wednesday, or Friday," she told ConsumerAffairs.com.
"The technician would call at 9 in the morning to tell me what time that day they would arrive. Their technicians do not do home repairs on weekends or evenings. When I said that wouldn't work for me, as I always work during the day, every workday, as do most people, I was informed that nothing could be done. I cannot take it into Circuit City either, because they do not repair televisions over 25 inches in the store."
3. The Warranty May Not Cover What You Think It Does
It's particularly infuriating to consumers when they purchase an extended warranty, only to be told it doesn't cover their repair when they try to use it. Paul, of Lexington, Kentucky, tells us he ran into that problem when he tried to use his Best Buy service contract to repair a faulty headset speaker, faulty key pad and scratched screen on his Motorola cell phone.
"Two people nullified my claim stating that service plan does not cover the scratch," Paul told ConsumerAffairs.com.
But not only does the contract not cover the scratch, Paul said Best Buy refused to even take the phone in for service under the warranty.
"Consequently, they will not do anything to fix the other two issues covered by the warranty because of the scratch. To the best of my understanding of the contract wording, it does not state that the existence of physical damage nullifies any other service which is covered."
Alex, of Woodstock, George, bought a large screen TV from Best Buy in 2001, along with a four-year extended warranty. This year, in the final year of the contract, he says he began having repeated problems that Best Buy tried to repair.
"I have had the TV repaired four times since April. Well, the last time the tech informed me that it is now considered a lemon under their warranty plan and needs to be replaced," Alex told ConsumerAffairs.com.
"The technician called to get approval to replace the set and guess what, they said the warranty is now invalid! How convenient! I now have a broken TV with two months remaining on my four year plan and they will not repair or replace it. They stated that there is nothing they can do about it."
Linda, of North Plainfield, New Jersey, purchased a four year extended warranty on her living room sofa, covering stains, tears and burns.
"Today I noticed a spot on the back of the sofa, which stands alone in the living room. The best way to describe the spots is that the fabric is peeling. If the sofa was against something I would say it may have rubbed the spots but it would have had to have been against a brick wall to do this damage. The service warranty purchased with our new furniture 2 years ago is supposed to cover any issues like this. They have refused to even send someone out to look at it," Linda said.
And finally, there's the case of Ken, from Plainsboro, New Jersey, who discovered that there are real limits on what his Maytag washer extended warranty would pay, even on covered repairs.
"The dishwasher has been a problem since the beginning. It just won't clean and has had multiple broken parts. I was just told after 10 plus service calls that the previous service calls have, in total, exceeded the value of the dishwasher' and our warranty is now void. Because they sold me an ineffective dishwasher that constantly broke, and have come to service it too often, I am now left with no valid warranty and a washer that doesn't clean. I hope this seems as ridiculous to you as it does to me," Ken told ConsumerAffairs.com.
4. Warranty Underwriter May Go Out Of Business
When considering the purchase of an extended warranty, an important question is just who is guaranteeing this product? Is it the merchant who is selling the product or someone else? Will the entity providing the guarantee be around if you ever file a claim?
In August 2003 hundreds of thousands of American motorists found they were holding worthless extended warranty policies following the bankruptcy of National Warranty Insurance Co. Offering Smart Choice extended warranties through 5,000 car dealers nationwide, the company had about a million active contracts when it went under.
Though Smart Choice has been out of business over two years, some consumers are only now finding out they have a problem.
"I bought a 1999 Saturn in August 2002 and, at the same time, bought the Smart Choice extended car warranty for $1500.00. All of my routine service and repairs were done at the Saturn dealership; however, none of the repairs seemed to be covered under this extended warranty," Donna, of Cortland, Illinois told ConsumerAffairs.com.
"In late 2004, I began looking into this matter and learned that SmartChoice went bankrupt, though I was never notified or received any compensation for the warranty. I have had to spend out of pocket dollars getting my car repaired. I have a car loan on this vehicle which also includes the $1500.00 for the extended warranty."
SmartChoice is not the only warranty company to have solvency problems. Toni, of Allen, Texas got a nasty surprise from Platinum Warranty Corp.
"I paid $2,200 for an extended warranty for my car from Platinum Warranty Corp. I found out, when I put my car in the shop for $4,000 worth of work, the company is under investigation for fraud by the Attorney Generals office for the state of Ohio. I'm out the cost of the warranty plus car repairs and rental car charges."
Stacey, of Hanover, Pennsylvania had a similar experience after purchasing a two year, 24,000 mile warranty from Platinum.
"Now that my car needs repairs, I call to get information on how to get the car fixed. None of telephone numbers are good, I get a recording saying this number is no longer in use!!! I cannot get in contact with them. And my car needs repairs. I have never even filed a claim with them. I purchased the warranty back in December 2004. What do I do? Where are they? Are they out of business?"
In fact, they are. Platinum Warranty Corp ceased operations September 30 after being sued by the state of Ohio last year and filing for Chapter 11 bankruptcy in May. A Cleveland bankruptcy court converted the Chapter 11 filing to Chapter 7 on October 12.
5. The Extended Warranty May Overlap Manufacturer's Warranty
The whole idea behind an extended warranty is that it will "extend" coverage after the manufacturers' warranty expires. So, before considering any extended service plan, you should always review the manufacturer's warranty to determine what it covers and how long it lasts.
If the manufacturer's warranty is for one year, for example, and you purchase a two-year extended warranty that runs concurrently, half the cost is wasted, assuming both warranties have equal coverage.
"I purchased a Microsoft Xbox with a 2-year warranty at Best Buy. I was not told the warranty ran concurrently with the manufacture's warranty when I purchased it at the counter. Most additional warranties start after the manufacture's warranty. I think this practice is very deceptive," Jerry, of Palm Springs, California, told ConsumerAffairs.com.
Under Law, It's Not Even A Warranty
The Federal Trade Commission says consumers, before signing any extended coverage contract, should fully understand its terms and coverage. The agency also stresses that what consumers are actually buying is not an extended warranty but a "service contract."
"A service contract is a promise to perform, or pay for, certain repairs or services. Although a service contract is sometimes called an extended warranty,' under federal law, it is not a warranty," the FTC said.
"A warranty comes with the original price of the car, whereas a service contract costs extra. It is mainly this separate and additional cost that distinguishes a service contract from a warranty."
There are many things to consider when you're offered an "extended warranty" or "service contract" with your purchase. Consumers might do well to consider the advice of their fellow consumers, who've learned from bitter experience that purchasing an extended warranty does not always provide the peace of mind and financial protection they assumed it would.
Abdellah, or Norwalk, Connecticut, paid $1326 for an extended warranty on his used car two years ago, but if he had it to do over, he would decline.
"Extended warranties are a waste of money and will only add to your frustrations. Since I bought this extended warranty in August 2003, they paid for about $300 worth of services done to my car on two occasions, where I had to pay $50 deductible on both jobs. Now I paid over $600 myself to do the timing belt job. Considering what I paid for the warranty, and the runaround I was given, I don't see any sense of having an extended warranty. It's a waste of money, time and added frustration."
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