An extended warranty can usually be defined as a service contract that is in place to repair items (or occasionally replace them) if they break under normal use, after the initial manufacturer’s warranty has expired. Essentially, those buying an extended warranty get an additional length of time where the items will be repaired or replaced provided they were used in a normal fashion. The terms of this extension may be different than original warranties. This is because most extended warranties are not sold by the manufacturer but are instead sold by companies that retail goods, like electronics equipment or automobiles.
Price for extended warranties tends to be about 10-30% of price of the item sold. This may be an important consideration when a customer is presented with the option of buying this additional protection. Low cost items may be cheaper to repair or replace than the cost of the warranty, and this may make buying an extended warranty unnecessary or a poor financial risk.
Especially when these service contracts are sold by third parties, they are not motivated by what is good for the customer. They are sold to make a profit for the company, which means the company is betting, and is usually right, on the fact that normal use of the product won’t cause it to break. About the only extended warranties that appear to be unprofitable to companies are those sold for digital or projection televisions and occasionally lower cost computers. Expensive digital cameras may break too and it might be worthwhile, as is recommended by some consumer groups, to buy an extended warranty for these items.
There’s considerable debate on the virtue of buying an extended warranty for newly purchased used cars. Sometimes the only warranty available when a car is several years old is through the dealer selling it. Warranties from manufacturers of automobiles are usually considered the most comprehensive and easiest to use. The other type of warranties offered are “aftermarket” service contracts, and these can vary in how easy they are to use and exactly what they cover. It’s important to consider exactly what these warranties cover, and what they exclude. Understanding restrictions is vital in deciding if the price is worth it, and price can be very high.
Another thing to look at when buying an extended warranty for a used car is whether the manufacturer already covers the car. Many car companies have begun to offer significantly longer warranties that can last five to ten years, are free with the purchase of the car, and are transferable to new owners. If a used car is only a few years old, it may still be covered by its original manufacturer for several more years, which means buying an extended warranty makes no sense.
Finally, consumers should be aware of several extended warranty scams that apply to mostly automobiles. The first is one practiced by some disreputable auto dealers who inform purchasers that buying an extended warranty is the only way they can get financing for their car. This is not true, and a retailer who informs people of this is lying and should not be trusted.
A much more pervasive scam began occurring in the 2000s and evoked a warning from several US Attorney Generals. People are contacted by email, snail mail or phone and told that their auto warranty is expiring, but if they call, pay for, or give information to the company, they can extend their warranty. In reality, most of these scams are really phishing for information and want things like social security numbers, which they can then steal. Calls or mail informing people that warranties are expiring should be ignored, and people should not call any suggested numbers associated with these phony warnings.
