EXTENDED
WARRANTIES
Thousands
of people may be buying extended warranties, as they choose CD
players, mobile phones and computers for Christmas. If you’re
buying electrical goods, there’s considerable pressure put
on you to buy the extended warranty. But are they a good investment?
Extended warranties
will always appeal to nature’s worriers. If you do want
to buy one, do at least resist buying cover on the spot. Retailers,
manufacturers and insurance companies all sell extended warranties,
as do a few banks and utility companies. A quick ring round could
save you hundreds of pounds.
There are substantial
differences between policies, especially in
their price. There are also differences in what the policies
offer. Some offer free theft and accidental damage insurance,
and the start date of the cover, some require you
to take out the policy within one year of the purchase date,
but others provide cover for much older products. However the
basic protection, in case of a breakdown, does not vary.
Indeed, even companies charging very different rates sometimes contract out work
to the same repairers.
Remember – even
if you do sign on the spot, most extended warranties
come with a short cooling off period, usually 14 days.
So if you find cheaper cover elsewhere, you can cancel your original
contract.
Consider a multi
appliance policy.They cover several products
at once, and some will cover all the electrical items in your
house.
Check
how much it will cost in the long run. If you
take out a pay monthly warranty, it will sound cheap when you
only look at the monthly cost, but they can be more expensive.
In
some cases, they can cost more than the goods, as a journalist
with The Times, Mark Atherton discovered when he carried
out a survey of extended warranties for 'Times Money'.
He found that people are being persuaded to buy expensive policies insuring
the item for breakdowns. It is all entirely legal, but the cost of these extended
warranty policies may often be greater than the likely repair bills against
which they are supposed to be guarding. In some cases, the policy can even
cost more than the gadget or appliance purchased.
For example cover
for a £599 Dixons computer - which comes with a three-year manufacturer's
guarantee - would cost £300 for a further two years.
In
The Link, a division of the Dixons retailing empire, the four-year warranty
for a £79 mobile phone was £109. Tiny Computers,
meanwhile, was asking £ 499 to cover a £799 computer
for five years.
A five-year
warranty for a £ 378 digital wide-screen colour TV from
Currys, another Dixons division, cost £185. Yet, according
to figures from the Consumers' Association, the average cost
of a TV repair is just £44. Dixons emphasises, however,
that its warranties cover accidental damage and other benefits
as well as cover for breakdowns.
The sale of
these policies continues despite the increased reliability of
both brown and white electrical goods. Research by Which?, the
consumer magazine, shows that only one in three TV sets breaks
down within five years, one in four video recorders and one in
eight microwave ovens.
Similarly more
than three quarters of washing machines do not break down within
the first six years of their lives. However, during our survey,
carried out this week in a high street in South London, Times
Money found that sales staff said that items "could
break down" within two to five years.
The Consumers'
Association, which has been a constant critic of extended
warranties, adds that these policies are often described as "three-year'
or "five-year" even though one of those years is
covered by the manufacturer's guarantee, so effectively they are for two or four years.
Despite the
questions raised over the value of warranties and an investigation
five years ago by the Office of Fair Trading - which concluded
that extended warranties were more expensive than the likely
cost of repairs
over the warranty period - shops remain eager to sell the policies.
This may have
something to do with the fat commissions that are paid to retailers
by the insurers. The level of these commissions is a closely
kept secret that none of the retailers approached would divulge.
But retail
analysts estimate that extended warranties earn between 20
per cent and 30 per cent of the profits of brown and white
goods retailers.
It is interesting to note that buying an identical policy direct
from a specialist extended warranty insurer, such as Domestic & General, one of the biggest
players in this Pounds 600 million-a-year market, can cost a quarter of the
price asked by a big retailer. Anyone paying £185 at Currys for a Cornhill
policy for a wide-screen TV could save £ 96 by going to Domestic & General.
If you are
prepared to take a three-year rather than a five-year guarantee
covering a Tiny computer, you could reduce the premium from £499
to £84 - a remarkable saving of £415.
Domestic & General said:
"We are the UK's largest specialist provider of breakdown
cover. We suggest people shop around because the cost varies
considerably."
Asda has a
free three-year warranty on all electrical goods in its stores
apart from mobile phones and electric toothbrushes.
Asda said:
"Our warranties are just as comprehensive as our rivals',
but we do not believe it is necessary to make customers pay for
them.
"There
might have been an excuse to charge for warranties ten to 15
years ago when electrical goods were more likely to break down.
Now they are much more reliable and we get very few items returned
for repair."
Dixons,
however, said:
"Our extended warranties offer more than just cover against repairs.
They cover accidental damage and provide other benefits such as a helpline for
those
who need to make a claim. They offer peace of mind."
This view has
some support in the City. Nick Bubb, a retail analyst
at SG Securities, said:
"People who are buying complicated technology want peace of mind and
are prepared to pay for it. Groups like Dixons do offer a considerable amount
of
aftercare support and have invested quite heavily in it."
After pressure
from the Office of Fair Trading and the Consumers' Association,
the British Retail Consortium agreed on a code of practice for
selling extended warranties.
This says that
shops should clearly display and make available leaflets detailing
terms, conditions and prices of their extended warranties.
However, in
some of the shops that visited for the Time survey, including
Radio Rentals and Tiny Computers, such leaflets were not available.
In Dixons, Currys and The Link they were, however, available.
Consumers'
Association: Tel: 020-7830 6000,
Domestic and General: Tel:08705-490 000
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