David Stonehouse News

Take your time to decide

That extended warranty may be your best bet, but give it some thought, David Stonehouse advises.

These days, you can hardly buy anything with a bit of electronic gadgetry in it without the salesperson offering to sweeten the deal with an extended warranty. Whether it's an electronic organizer, a new range oven or a snazzy new laptop, you can ratchet up the guarantees on it with little muss and fuss.

It's not free, of course, but paying out a little more seems a small price for peace of mind.

Or so I thought.

A few weeks ago, after deciding on a $369 CD burner that promises to be everything I could ever want in such a thing, the young sales buck at Future Shop hits me up with the pitch: For another $50, I get protection against breakdown all the way through to 2005.

I hesitate. He tells me it would be a smart move -- he's had one of these, see, and it busted at least twice. With the warranty, when that happens to me, I can just hike back to the store with the burnt-out burner and take home a new one. Right then and there. Won't cost me a dime.

I am nodding as I pass over my MasterCard.

"Sure," I say, "add it on. Can't hurt."

My anxiety over the questionable reliability of the burner fades. I feel better.

But days after, I start asking around. I check with consumer advocates and read up on extended warranties. Now I feel like a sucker. Like I've been railroaded, duped, taken in by the force of the know-it-all sales pitch.

"Extended warranties are just about the most expensive form of insurance that you can buy," says Paul Reynolds, an Ottawa native who is products editor with Consumer Reports in Yonkers, New York.

"You can be almost assured that a retailer is going to make more on selling you the extended warranty than they are making on selling you the item itself, particularly with lower priced items -- smaller-sized TV sets, VCRs, DVD players," he says. "They are making a pretty small margin on those items, and that is where some retailers are aggressive in trying to sell you an extended warranty."

Last fall, the magazine concluded that extended warranties are generally not a wise investment. Consumer Reports found that the average cost of repairing a wide range of household appliances and electronics was typically comparable to the warranty cost.

With some, the repair costs more. But you're only saving money if it needs repair. And that, it turns out, is unlikely. Most often, Consumer Reports found, the goods did not require any fixing within three years. The most likely in need of fixing were lawn tractors -- nearly three in 10 needed repair -- while almost four in 10 desktop computers needed something repaired. Meanwhile, popular items like televisions,
microwaves, and VCRs all had a less than one in 10 chance of needing any repair within the warranty period.

In other words, odds are you are buying a warranty you will never need.

"There is a slight chance with some of these items that you can end up with a repair that might be higher than the warranty cost. And if that possibility keeps you awake at night, you might consider buying an extended warranty," Mr. Reynolds says. "But we think that they are really, overall, a poor buy."

It's not long before I realize I have another reason to feel stupid. As the experts so graciously point out, credit card companies often extend a product warranty against both defect and accident if you pay for the goods with a their gold or platinum cards.

I paid with platinum. Dumb, dumb, dumb.

Sometimes, too, the protection for items such as laptops can be added to your home insurance policy for a lower cost than the extended warranty, so it is a good idea to check with your insurer.

Jenny Hillard advises people like me not to be rushed into making a decision right there at the cash register. Ms. Hillard, vice-president of the Consumers Association of Canada, suggests asking for a copy of the warranty, taking it home, reading the small print, and giving it some thought first.

"A lot of people will tend, somewhat foolishly, to say, 'I spent $2,000 on this so what is an extra $50 to extend the warranty by two years?' But they don't read all the details to find out what isn't covered," she says. "But it is important to know what it is you are paying for."

There are a lot of exemptions, for example, on computer warranties. Often, monitors, wires, batteries and software problems are not included in extended coverage, she says. That means the extra money you are slapping down doesn't cover much.

Then I talked to some of the companies that offer warranty coverage. They make me feel better.

"I think a lot of it depends on personal comfort," says Daren Khatib, Canadian consumer business organization director of service and support for Hewlett-Packard in Canada. "If you are comfortable with the technology that you have purchased, you might not feel you need that level of protection. But if you are not comfortable with it, you are going to need to call someone."

Good point. While I have learned a lot about troubleshooting my own gadgetry, a lot of folks are clueless when it comes to computers, and having a toll-free number to ring up for help can be a reason enough for warranty protection.

The other thing to consider is convenience. If you are buying something for your own business and having it out of commission will be costly, a hassle-free service or over-the-counter exchange warranty may well be worth it to you.

One of the largest companies in the business estimates that as many as one in four consumers pay out for extended warranties for products worth more than $250. And of those that do have coverage, VAC Service Ltd. of Middletown, New York, estimates that only 15 to 20 per cent ever take advantage of it.

"It's like life insurance," says Charles Romano, the company's senior vice-president of sales and marketing. "You don't buy it to cash in on it. You buy it as peace of mind."

Buying peace of mind for consumer goods has turned out to be a big industry, with one executive estimating the American market alone is now worth about $6 billion U.S.

Michael Bailey, Canadian president for Texas-based Warrantech Corporation, estimates the industry in this country is worth about one-tenth of that.

He advises consumers who do chose extended warranties to make sure those warranties are insured, noting that guarantees are no good if they are backed by retail chains that go out of business. He cites Eatons or Multitech Warehouse Direct stores as examples: anyone who bought a warranty from them was out of luck.

"There is a long list of retailers that have gone down. There are a lot of majors who do not insure their program," says Mr. Bailey, whose company sells and administers warranty programs that are insured.

Karen Lund, a productivity consultant to businesses around the world, advises companies on warranty practices.

"Is it a way to make extra money? Absolutely," she says from her office in St. Paul, Minnesota. "That's the purpose of marketing. They want you to buy, and they want you to buy all you can."

But it doesn't necessarily mean you should not buy one. She made sure she bought an extended warranty when she bought a new Toyota, reading all of the details of the protection before she signed on for it.

"It only cost me $10 a month. I use my car all the time. I'm out every day, working. So let's just say I had to have a transmission replaced in that car. Do I have $1,000 or whatever it costs to replace the transmission? Or would I prefer to give them $10 a month and have somebody else assume that risk?" she says.

Phil Edmonston, author of the Lemon-Aid car guides, argues it is often not worth the money to buy more protection for your car.

Consumer protection legislation in every province across the country often affords car buyers better coverage than they can buy.

But that can also mean having to go to court and convincing a judge you should not have to pay for a hidden defect.

"If you don't mind writing a complaint letter and going to small claims court, don't waste your money," he says about added protection offers. " But most people dread having to argue over who pays for the repair after the normal warranty is over."

He says most people don't know that they can aggressively bargain down the price of an extended car warranty.

"The gross profit," he says, "is at least 50 per cent for the dealer selling these warranties that vary from $750 to as high as $1,500."

But he still doesn't like the idea. "On principle, I dislike extended warranties because it's like saying, 'We make a product; we don't make the product very well; therefore we will protect you from our mistakes -- for a price. And the danger of that, I feel, is what incentive do we give companies to produce their vehicles right the first time?"