Step 62: Warranties and Service Contracts

Step 62 of the 100 steps to financial independence: Warranties and Service Contracts
Step 62: Warranties and Service Contracts

When you make a big purchase such as a new car or appliance for your house, the selling company often provides a warranty on the product. The warranty is a guarantee for a set period of time during which the manufacturer promises a correct functioning of the product and to replace or repair the product if the product is faulty.

Warranties are very important to understand and keep as they can save you a lot of money and worries if you ever need them. This step will look at warranties and extra warranties in detail, so you can assess any current warranties you have and to allow you to compare and evaluate warranties on any future purchases.

What a warranty typically includes

Normally a warranty will specify and /or include the following:

  • How long it is valid for. For some products this might be no more than 6 months, other products might be covered for several years.
  • What circumstances might void the warranty. The manufacturer often includes reasons why a warranty might cease to be valid, such as not having done regular maintenance check ups and servicing or using the product incorrectly.
  • Services included: what happens if the product is faulty? Will it be replaced, repaired or will your money be refunded?
  • Services excluded: this might not actually be stated in the warranty, but make sure you find out what is not included if your product fails. Think of costs to do with transporting the product to the shop or factory, labor charges etc.
  • Does it include costs you might have as a consequence of the product being faulty? For example if your washing machine floods your house, will the damage to other objects and furniture be covered, or if the fridge-freezer breaks will you be reimbursed for any of the contents gone off?

Extra warranties or service contract

Although the manufacturer of the product will normally give you an automatic warranty with the product that is standardly included in the price, the shop where you buy the product or indeed the manufacturer itself might recommend taking out an extra warranty or so-called “service contract” on the product and is in essence an insurance on the product. Although this can often sound like a very good deal, consider the following points before you commit to taken out this extra coverage:

  • What is the added value of the service contract over the standard warranty? I.e. what is the difference?
  • How much would that extra value cost you if you had to pay for it? For example if the extra warranty pays for labor costs, is that really worth it, or would labor costs have been cheaper to pay directly?
  • What makes the service contract go void?
  • How likely is the product to break within the time frame of the extra coverage?
  • How much would it cost you to pay for the repairs or a replacement yourself?
  • Is there a deductible, i.e. amount of money you will be required to pay as a minimum anyway?

Do you actually need a service contract

There are two main factors to consider when you are tempted to get an extra service contract out on a new purchase:

  1. Overall a service contract is just another commercial product intended to make the company who sells it some more money. If a company sells extra warranties, they set the price and conditions to their customers in such a way that they know they are still making money on the warranty. Say 100 people buy the extra warranty for a one-off payment of $50, the company invoiced $5.000. They know that of those 100 people maybe only 7 people will use the warranty and that their average cost per person is about $300 (labor wages, replacement costs and maybe one item that they need to replace in full). So they will spend $2.100 of the $5.000 they made. As you can see extra warranties are in the interest of the selling company who make some extra money, whereas the majority of the customers have spent an extra $50 without using the extra warranty.
  2. Instead of ever taking out extra warranties, consider saving that amount. If you never took out any extra warranty, but instead put that amount in a savings account and did nothing with it (apart from adding more money when you buy a new product and again declined the service contract), you might be better off than taking out an extra warranty each time. You are unlikely to use all of your extra warranties, so if you saved the money, you have extra savings building up. If a product needs servicing or replacing you have your money right there to use, almost like your own warranty. If you don’t you keep the money as a nice extra reserve.

When you are about to make a big purchase you are often conscious about the amount of money you’ll be paying and any possible damage that might occur to the product. Extra warranties often play with this fear as the company knows that you are probably happy to pay a little extra in exchange for some extra security. Often times this extra security doesn’t give you so much extra however and isn’t worth it, it was just a clever way by the company to get some extra money off you.

That said in some cases getting a service contract might be totally worth, especially for very expensive items or items that are likely to break.

Step 62 – Warranties and Service Contracts – in detail

A problem many people (me included) have is that they lose their warranty statements or don’t know whether a product still has a warranty on it. They then end up not using it even if they have taken out an extra warranty. Let’s set ourselves up to avoid this in the future:

  • Find a designated space to keep all your warranties such as in your home office.
  • Decide how to keep your warranties: in a big A-Z folder, a shoebox or a filing cabinet.
  • Go through any warranties and manuals you might have and pull out any warranty statements. Bear in mind you often need to have the receipt of the purchase kept with it to prove when you bought the product as many warranties have a limited time on it.
  • You can staple or tape the receipt to the warranty and file it away by date, supplier or type of product.
  • From now on when you buy a new product that has a warranty on it, carefully check the warranty before you buy so you can decide whether it offers enough coverage. Checking the warranty can also help you decide chosing between two products if the warranty of one is more extensive than the other for example.
  • If you are offered a service contract on it, make sure you know what the extra coverage is and whether it is worth the extra payment.
  • File the warranty along with the receipt away in your warranty filing area as soon as possible. Don’t leave it lying around as it will just get lost and go missing, meaning you won’t be able to use it.
  • If you didn’t opt for the service contract, consider putting the money you saved (i.e. didn’t spend)  in a special savings account or towards your emergency fund so you can use it in case you need it for the reparation or replacement of any of your products.

Warranties are a really good way to insure your product for a certain amount of time. Be sceptical about extra warranties as although sometimes they might offer real value for their price, you are also unlikely to ever use all the extra warranties you take out on all major appliances and products you own.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.

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