Tips From The BBB—

Get The Real Deal On Service Contracts, Extended Warrantees

A new Better Business Bureau (BBB) national survey conducted by market research firm Kelton Research finds that more than four in ten (42 percent) Americans admit they do not look at extended warranty policies that come with their purchase. Further, nearly half (46 percent) of the consumers surveyed do not read service contracts either. 

Extended warranties and service contracts are popular with the American public. According to Warranty Week, an online industry newsletter, consumers were expected to purchase approximately $1.6 billion of extended warranties and service contracts on PCs, consumer electronics and major appliances this holiday season.

Extended warranties and service contracts for electronics and other products mean big money for retailers. Generally, the profit margin on such products is slim, perhaps only a few percentage points — but the margin can be 50 to 60 percent or more on extended warranties.

In fact, the margins are so good that analysts estimate in 2003 warranties accounted for most of Circuit City’s operating income and almost half of Best Buy’s operating income. 

“There’s an ongoing debate about whether extended warranties and service contracts are worth the upfront cost,” said Paulette Hotton, CEO of the BBB serving Connecticut. “The bottom line is that consumers need to make sure they completely understand the terms and weigh the value of purchasing an extended warranty or service contract versus the potential need for repair or replacement over time.”

To help ensure consumers get the most out of their purchases in 2008, the BBB has outlined what the average consumer needs to know when considering the purchase of an extended warranty or service contract :

Extended Warranty vs Service Contract: What’s The Difference?

Salespeople will often use the terms extended warranty and service contract interchangeably, but there is a distinction. An extended warranty is typically designed to protect you against any manufacturing defects beyond the life of the manufacturer’s express warranty.

A service contract, however, provides varying degrees of maintenance and upkeep as defined in the contract. An extended warranty offers protection if your computer inexplicably goes on the fritz; a service contract might protect you if you spill coffee all over your keyboard, but, then again, it might not.

This is why it’s always important to…

Read The Fine Print. As with any contract, you want to read the fine print of both the manufacturer’s express warranty and the extended policy. Usually you can even take the policy home to read it closely and sleep on the decision — and many extended warranties and service contracts do not have to be purchased at the point of sale and can be purchased at a later date up to a specified period of time.   

Know What You’re Really Getting. Make sure you do not duplicate coverage. Some protection may already be in-place for a specified period of time under what is known as “implied warranty” depending on state laws. Also, if you pay with a credit card, you may be eligible for an extended warranty through your credit card company that might be sufficient. 

Shop Around. Different retailers will offer different policies, so if buying an extended warranty or service contract is important to you, visit several retailers and find out which offers the best value.

Consider The Cost Of The Product. When considering an extended warranty or service plan, it is important to consider the cost ratio of the policy and the product. It is not really worth it to pay $50 for a policy to cover a $120 DVD player. You should also consider and calculate what it would cost for average repairs over the specified time period of the contract and compare it to the total cost of the service contract. If the product has a good track record for reliability, then the service contract could end up costing more money.     

Bottom Line: Are They Worth It? Considering how policies can vary, only you can decide if an extended warranty or service contract is worth the cost. Granted, extended warranties and service contracts are big money-makers for a retailer, which means that most consumers do not cash in on the coverage.  Consumer Reports found that with a few products, such as computers and plasma TVs, extended warranties are a good safety net and the extra coverage can provide you with peace of mind.

For more information about business and consumer issues, go to www.bbb.org.