NetNews Usenet Archive 1992 #30/NN_1992_30.iso/spool/misc/consumer/20722

Internet Message Format | 1992-12-16 | 8.2 KB

Path: sparky!uunet!olivea!spool.mu.edu!agate!ames!sun-barr!news2me.EBay.Sun.COM!seven-up.East.Sun.COM!laser!egreen
From: [e-mail] (Ed Green - Pixel Cruncher)
Newsgroups: misc.consumers
Subject: Re: OK..why shouldnt I get an extended car war
Message-ID: <[e-mail]>
Date: 16 Dec 92 15:25:25 GMT
References: <[e-mail]>
Reply-To: [e-mail]
Organization: Sun Microsystems, RTP, NC
Lines: 169
NNTP-Posting-Host: laser.east.sun.com
Cc: [e-mail] (Ken Staggers)

In article [e-mail], [e-mail] (Ken Staggers) writes:
>They made
>the extended car warranty sound OH SO GOOD.  After listening to him,
>I couldnt remember anything the net has said about these warranties.
>I need to be reminded...why are they such a bad deal?

It's been awhile, so here beginnith my extended_warranties.FAQ:

In the interest of bandwidth, I suggest that those with different
opinions and reasoning reply, we may all learn something (please cc me
as well, I may add your views to the FAQ).  Personal testimonies about
"how an EW saved me $4M once" don't really contribute much to the
discussion.

-Ed



Extended Warranties

Refrigerators, computers, motorcycles, and most other manufactured
goods are manufactured using statistical methods of quality control.
Every single unit is not thoroughly inspected and tested.  It is
entirely possible (eventually, a certainty) that some sub-standard
units will slip by such QC and be shipped to customers.  To protect
against this eventuality, the manufacturer offers a warranty on the
product.  The warranty generally covers "defects in material or
workmanship" for some period of time.  At the termination of this
warranty period (whether you ever require service under the terms of
the warranty or not), the manufacturer is reasonably assured that the
occasional sub-standard unit has been found, and he has had the
opportunity to bring it up to his standard of quality.

(BTW, this is all a standard warranty is and all it is intended for, it
is not a promise that product will operate perfectly, and the product
is not designed to fail immediately after the warranty period.  It is
simply a policy which allows the manufacturer to use statistical
methods of quality control, holding down the cost of part of the
manufacturing process.)

With this understanding of the standard warranty, let's now look at the
"extended warranty" (EW). At the termination of the standard warranty,
the manufacturer is reasonably certain all his units are up to his
standard of quality.  At this point, he is essentially making a wager
with you that the product will not fail, in the manner specified in the
EW, during the term of the EW.  If he wins this wager, he keeps the
price of the EW.  If he loses this wager, he keeps that price minus his
repair cost, which may or may not mean he actually loses money on the
deal (depending on the repair cost, of course, which is generally much
lower to him than what you would be charged for the same services).

What does the manufacturer bring to the table in making this wager?
His extensive knowledge of the product, its design and manufacture;
statistical data on the frequency and severity of repair work required
on the product, over its life history;  the collective knowledge and
expertise of his R&D and design staff on the physics and engineering
principles of the product's operation;  accurate cost models on the
cost of various modes of repair if necessary;  extensive data culled
from *other* EW's;  etc.

What do you bring to the table in making this wager?  For most people,
the answer to this is, "only a vague fear of the product breaking down
in the future, requiring repair."  If you have faith that you are
buying a quality product from a reputable manufacturer, why assume it
is going to break down?  If you are buying junk, take the cost of the
EW and buy a higher quality product to begin with.

Aside from that, the fact is that EW's are often sold and serviced by
third parties, who may or may not be able to provide competent repairs
if necessary.  These third party EW's pay a heavy commission to the
salesman/dealer, which is why they are pushed so hard.

If you think about it, to make an EW "pay off" for you, you have to
hope that the product breaks down in a major way!!  Why buy something
and hope it breaks?!?  Take the cost of the EW and apply it towards
tools and education to fix the product yourself (hidden benefit:  you
will learn to do preventative maintenance, and the major break-down
will never occur).  Invest the cost of the EW, and you will have more
money to spend on repair if/when it does break down;  if it never does,
you have the money to buy a new one!

Extended Warranties are almost always a rip-off.


If you still think you need one, the following is from a Bob Niland
([e-mail]) post to misc.consumers on choosing an extended
warranty:

----- Begin Included Message -----

My first test on extended warranties (EW) for consumer products is:

  * Is it less than 4% of purchase price per year?  Use the "future value"
    of the payment(s), at a reasonable interest rate, to compute the
    percentage.  4% is approximately what HP charges for return-to-HP
    service on our computer products (and the HP charge is periodic -not
    lump sum- and doesn't start until the warranty expires).

Almost all EWs on consumer products exceed 4% by a substantial amount.
Furthermore, since you often pay a lump sum up front, the seller is getting
the use of your money, plus a free ride for during the manufacturer's
warranty period (which is when the bulk of the failures occur anyway).

If the contract passes this test, then check into:

 * Actual legal terms & conditions - many EWs are only described in brief
   flyers, and the retailer often cannot provide the full terms of what you
   are agreeing to (which may differ from what you are being told verbally,
   and may even differ from the flyer).

 * Who underwrites the contract?  Will they be around in 3 years?

 * Who services the product?  Are they factory-trained and authorized?

 * Is the contract for "repair or replace (or better yet refund)"?  If so,
   what constitutes a "replacement" - and can you veto it?  If refund, is it
   for original, residual, pro-rated or replacement value?  Who determines
   it?

 * What is your recourse in cases of extreme repair delays, or "repairs"
   that aren't or damage your equipment even further.

 * What does the retailer have to do to "register" your EW?  How can you
   confirm that this step actually happens?

Generally, based on typical EW prices, if you were to invest the contract-
equivalent amount of money on each product purchase, you would shortly have
about ten times what you need to replace a product by the time the first one
fails.

Consumer EWs are primarily a way for retailers and their salespeople to
generate extra profits and commissions, respectively.  They rely on the the
following:

  - consumer electronics has a very low failure rate;

  - if it fails, it will probably fail on the manufacturer's dime;

  - if it fails later, you will probably have forgotten the EW;

  - if you remember, you won't be able to locate the paperwork;

  - if you find the papers, you won't be able to locate the provider;

  - if you locate the provider, they will hassle you until you give up;

  - if you don't give up, they will either fix your device beyond repair, or

  - insist on replacing it with something that may or may not be "equivalent"
    but surely will be lots cheaper than today's models.

As in most things, beware of anecdotal evidence.  You will hear from a few
vocal people who "got their money's worth" on an EW.  You are far less
likely to hear others admit that:

 a. They got taken (had the device fail and got no satisfaction for one
    or more of the above reasons).

 b. They probably got taken ("well, it hasn't failed yet" -or- "I sold it/
    traded-in/gave it away before the EW expired")

----- End Included Message -----


---
Ed Green, former Ninjaite |I was drinking last night with a biker,
  [e-mail]   |and I showed him a picture of you.  I said,
DoD #0111  [phone]  |"Go on, get to know her, you'll like her!"
 (The Grateful Dead) -->  |It seemed like the least I could do...