__________________________________________________________________________ Extended Warranties Standard Reply Edition: 16 Jan 97 My first test on extended warranties (EW) for consumer products is: * Why does this product need it? What is the annualized failure rate (AFR) on this device? If the dealer can't provide AFR (and they usually can't), back it out of the EW price. If the EW price is, say 25% of purchase price per year, ask them: You mean that 25% of these devices fail per year? Why are you selling me such junk? Oh, the failure rate is much lower than that? Then why is the EW price so high? Where is the money going? (answer: generous commissions) My second test on EWs 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. Be sure to subtract out the manufacturer's warranty period before making the price/time computation. 4% is approximately what major computer vendors charge for return-to-vendor service on their products (and the charge is periodic and it doesn't start until the warranty expires). Almost all EWs on consumer products exceed the 4%-per-year figure 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 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). * In particular, does the EW cover lightning damage? In some geographic areas, lightning causes more equipment damage than internal failures. If the EW doesn't mention lightning specifically, does it exclude it by implication, with terms like "natural disasters". * Who underwrites the contract? Will they be around in 3 or 5 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 the value? * Is there a hidden "escape clause", that limits the service provider's liability? Many EWs limit the liability to the replacement value of the product, or more significantly, to the remaining value in the contract. They are not actually obliged to fix your widget! They can simply give you back a pro-rated portion of the price of the EW contract. * What is your recourse in cases of extreme repair delays, or "repairs" that aren't, or that 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. On computer equipment, the device is likely to be technologically and economically obsolete by the time it fails. You are likely to want to upgrade the device long before the EW expires, thus discarding the remaining value of the EW. The Truth About EWs: 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 electronic devices have a very low failure rate; - if one fails, it will probably fail during the manufacturer's warranty; - 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 will surely be lots cheaper than today's model. - the number of people who get this far is so small that most of the EW money can be passed around as pure profit. You can often negotiate the price of an EW. As an indication of their "real value", the last two I obtained were thrown in free by the dealer. One device, a laserdisc player, is still going strong for its second owner, and the EW was never needed. On the other, a remaindered rug shampoo machine, it failed two years in (in this particular case, I wouldn't have bought the thing if the EW hand't been free - as there was a strong suspicion at point of sale that the model had been discontinued due to reliability problems). As in most things, beware of anecdotal evidence (esp. from sales people). 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") I expect one $500 appliance to fail and need replacing every year. They rarely disappoint me. If I had them all covered by EWs, I'm certain it would cost me a lot more than $500/year. Try This: Open a separate savings account. From this day forward, for each device you purchase on which an EW is offered, decline it, but put that amount of money in the account. In three years, you'll have a ton of spare cash. Regards, PO Box 248 Bob Niland Enterprise mailto:name@isp-name.domain Kansas which, due to spam, is: 67441-0248 USA rjn AT access DASH one DOT com Unless otherwise specifically stated expressing personal opinions and NOT speaking for any employer, client or Internet Service Provider.