CONSUMERS : Service Contracts: Peace of Mind for a Price
If you’re buying new home appliances, VCRs, disc players, computers or even cars, you’ll probably be pitched to purchase an extended warranty service contract on the product. It can come from the dealer or the manufacturer or through an independent company that sells service contracts on products. Most will be offered to you at the store when you’re buying the item.
Do you need one? That depends.
If you have a family of five children and plan to use a washing machine three or four times a day, you might be smart to get a service contract, because you’ll be using the appliance far more than a single person or childless couple.
Or if you’re a household of television addicts with a set running 15 hours a day, being turned on and off frequently, you’re a candidate for overuse of the TV, and maybe a breakdown after the standard warranty is up.
If you buy your teen-ager a portable CD that he’ll probably take to the beach, you might save yourself some expensive repairs by taking out extra warranty protection.
If you’re a true skeptic and believe that an appliance or electronic device will surely break down the day after its warranty is up, you may be happier with a service contract that extends the manufacturers’ warranty--usually only 90 days on a VCR, a year on televisions, refrigerators and washers.
On the other hand, you could take that money--service contracts on appliances and electronic equipment can run from $35 to more than $100 a year depending on the features of the contract--and put it in a savings account, where you’d have it in case the appliance breaks down and where you’d be collecting interest on the amount deposited.
But then, many people are not that disciplined and prefer to to buy a service contract up front, so they’ll know if it breaks, someone will come to fix it.
“They’re designed to favor the seller,” an industry analyst pointed out. “It’s like betting that the product won’t break down, and you’ll make a profit on the service contract. On the other hand, some do break down and then that’s in the consumer’s favor.”
In the end, experts say, your personal psychology may dictate what’s best for you.
As a rule, the more expensive a product is, the more its extended warranty contract will cost. Some service contracts on computers can run $200 a year; those on autos can hit $1,000 per year, especially if you’re taking one out on a Mercedes or Rolls-Royce.
Extended warranty service contracts are not a new phenomenon. They’ve been around for 30 years, first offered by Sears and Montgomery Ward when televisions began taking the country by storm in the 1950s.
Nonetheless, consumers seem to be looking for more and more peace of mind these days and are buying extended service contracts at an increasing rate.
Although some dealers and manufacturers offer consumers their own extended warranty service contracts, most seem to be handled by what the industry calls “third party administrators,” about 30 independent companies nationwide that issue the service contracts and guarantee that they are backed up by insurance.
In most cases, the third party administrator sells a service contract to a dealer or manufacturer, who in turn sells it to the customer for more than the dealer paid for it. In the end, everybody makes a profit on it, except the consumer. The only way the consumer wins is if the product breaks down during the specified time of service contract, which can run from one to usually five years.
‘A Branded Product’
For example: Elite Group Inc. in Torrance, a third-party administrator and marketing firm, administers extended warranty service contracts for Federated stores. The contract sold to the consumer informs him or her that it is insured and the customer is assured of getting service should the product need it.
“We offer a branded product,” Elite’s marketing director Mark Deo said. “Through the (extended warranty service) contract, Federated pledges to protect its customers. And it is our pledge to protect Federated and its customers. Federated pays us a fee for backing that plan.”
And Elite has a nationwide network of authorized service centers to do the repair work authorized by the contract--should a customer buy a product at Federated in California and move to Massachusetts.
Deo said that the current trend in extended warranty service contracts is that more and more consumers are volunteering for renewals when their first contract is about to run out.
‘Phenomenal’ Growth
“They’re calling asking if they can get a longer warranty,” he explained. “The growth in that area is phenomenal, because of the way society is now evolving. Customers are more and more concerned with service. They want to know that the product’s going to be insured. A good amount of our customers are educated, upscale consumers.”
According to David Ashton of the National Assn. of Retail Dealers of America, based in Lombard, Ill., extended warranty contracts are good business for the dealer, the salesperson, “and they give the consumer peace of mind. A product can be reliable, but there is no guarantee it’s not going to break down . . . then you’ve got the cost of parts and labor and many of these things are very expensive to repair. People don’t want to worry about fitting that extra sudden cost into their budget.”
Ashton said that about 90% of retail appliance and electronic dealers now offer extended warranty service contracts to their customers. He also estimates that in any one year probably one-third of all consumer goods sold are covered by additional service contracts extending the product’s warranty or guarantee from the manufacturer.
Experts advise that one thing consumers might consider is the relative reliability of modern day appliances.
‘Infinitely More Reliable’
“We don’t have the figures on how long they last, but they do have a good long life,” insisted Tom Lauterback, vice president of communications for the Electronic Industries Assn. in Washington, a trade group. “The product being made today is infinitely more reliable than before. VCRs, for instance, have more moving parts than most TVs, but they’re a good reliable product.”
As far as television replacement goes, Lauterback noted that “80% of all the 10-year-old sets, black and white and color, are still in use.”
Statistics point to the reliability of other appliances. A 1987 survey in Appliance magazine, an industry trade journal, listed the following average life spans: VCRs, about 8 years; stereos, microwaves and air conditioners, 11; washers, 13; dishwashers, 10; dryers, 14; freezers, 16, refrigerators, 17.
“A refrigerator can last 30 years,” said the Retail Dealer’s Ashton. “It depends on usage. The same thing is true of any product. How its used or abused.”
“The need for them (extended warranty service plans) is based on the reliability of the product,” said Ned Breen, co-manager of Great Western TV and Appliances in Los Angeles, a 36-year-old firm. “We think it’s a racket. There’s no real need for them. The reliability of appliances over the last 20 years has been dramatic. And they were pretty good before that.
“Those companies are getting more money in than they have to put out,” Breen continued. “The contracts are a waste of money as far as I’m concerned.”
The Electric Industry’s Lauterback, who called the advisability of service contracts one of “our abiding concerns,” offered some tips for consumers considering buying one: Read the product’s warranty coverage from the manufacturer so you’ll know what you’re getting with the product. “All major manufacturers provide darned good coverage,” he said.
* When they ask you if you want to supplement the manufacturers’ original coverage, find out what they’re offering, how much it is, how long it lasts, what exactly it covers. “A person might decide on extra coverage if he’s getting a VCR, because you have to worry about keeping the heads clean; or a CD because the technology is new.”
* Read and reread that service contract before you sign it. “I could certainly structure one in my favor. Any insurance is a bet that you’re expected to lose. Some service contracts are definitely better than others.”
Last month, the Electric Industry Assn., in cooperation with the Federal Trade Commission, released an informational pamphlet concerning service contracts. To obtain a copy, send a stamped, self-addressed No. 10 envelope to EIA, P.O. Box 19100, Washington, D.C. 20036. Mark your request SC for service contracts.
