Extended warranties: Don’t pay extra for nothing
Have you ever bought an extended warranty? Chances are you’ve been made to feel like it’s the best way to protect yourself against expensive repairs in the future. It’s not.
What many Australians don’t realise is they are protected under Australian Consumer Law and that, more often than not, the extended warranty being offered covers the same period and rights to repairs or replacement.
In other words, you’re paying for something that is available to you for free. It’s like taking out another insurance policy when you’re already covered. So why do so many retailers push extended warranties? And is there any occasion when it’s worth shelling out the extra dollars?
What is an extended warranty?
An extended warranty, also commonly referred to as a service contract or protection plan, is essentially a prolonged warranty offered to consumers in addition to the standard warranty that comes with a product. It is intended to cover certain costs associated with repairs, replacement parts, or sometimes even maintenance once the standard warranty has expired.
Unlike a standard warranty, which is included in the purchase price of the item and typically covers any manufacturing defects or faults that arise within a predefined period, an extended warranty usually kicks in after this initial warranty period has ended. They're designed to safeguard against the cost of future problems with the product.
For example, car manufacturer warranties usually cover three to five years of repairs. Beyond that, they might offer you an extended warranty. So, where the standard warranty is a guarantee from the manufacturer that the product will work as advertised for a specific period, the extended warranty is more of an insurance policy against the future possibility of mechanical breakdown or technical problems.
Who offers an extended warranty?
Retailers, manufacturers and third-party warranty companies usually provide extended warranties. Typically, the offer comes at the point of sale, often presented by a salesperson who might suggest that this additional protection is in your best interest.
For example, car manufacturer warranties usually cover three to five years of repairs. Beyond that, they might offer you an extended warranty. So, where the standard warranty is a guarantee from the manufacturer that the product will work as advertised for a specific period, the extended warranty is more of an insurance policy against the future possibility of mechanical breakdown or technical problems.
At times, manufacturers may offer extended warranties directly, especially for higher-end products or vehicles. Alternatively, third-party warranty companies sell standalone extended warranties that cover various products, often promising more comprehensive or longer-lasting coverage than retailers or manufacturers.
Some credit cards also offer extended warranty coverage as a perk. This applies to eligible purchases made with the card. The terms, conditions, and coverage limits vary significantly but generally speaking, this benefit can add anywhere from one to two years to the original manufacturer's warranty.
Extended warranty vs insurance policy
While extended warranties and insurance policies might appear similar at first glance, they serve different purposes and operate under distinct rules:
Nature of coverage
Insurance policies typically cover damages or losses resulting from unexpected events or accidents, such as fire, theft, or natural disasters. They are designed to protect against risks that might cause significant financial hardship.
In contrast, extended warranties cover the cost of repairs or replacements due to faults or defects outside the manufacturer's warranty period. They're often limited to mechanical or electrical failure under everyday use and don't cover damages caused by mishaps or negligence.
Terms and conditions
Insurance policies generally have well-defined terms and conditions regarding the extent and limitations of coverage. They often include a deductible, an upfront amount you must bear before the insurance kicks in.
The terms and conditions of extended warranties can vary widely, depending on the provider. They might cover the entire product, only specific components, or perhaps the labour cost associated with repairs. Furthermore, extended warranties often embed numerous exclusions within their fine print.
Regulation and oversight
Insurance providers in Australia are subject to rigorous regulation by entities like the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC). This regulation ensures consumer protection and mandates insurance providers to adhere to certain standards.
Conversely, extended warranties often escape such stringent regulations as they are usually regarded as service contracts, not insurance products. This classification can sometimes lead to less transparency in terms and conditions and complications in claim processes.
Duration of agreement
Insurance policies are generally long-standing arrangements, extending over several years or potentially a lifetime. In contrast, extended warranties are typically limited-term agreements, lasting for a specified period beyond the original manufacturer's warranty.
Are consumers required to buy extended warranties?
An extended warranty is a voluntary add-on, not a mandatory purchase.
There's often a misconception that extended warranties are necessary due to the persuasive sales tactics used at the point of sale. Salespeople may emphasise the potential for costly repairs or replacements, causing you to feel pressured into buying the warranty. In fact, according to a Choice study, 91 percent of retail stores will try to talk you into buying extended warranties. Big players such as Harvey Norman, JB Hi-Fi and The Good Guys were specifically mentioned in the report.
According to the same study, 71 percent don’t even fully understand what extended warranties are for. So why are we taking them out when the Australian Consumer Law (ACL) has a strong consumer protection framework in place?
How much are extended warranties?
The cost of extended warranties in Australia can vary widely. It ranges from a few hundred dollars per year to several thousand. To give you an idea, one retailer sells an extended warranty for $300 for a $1500 mid-range TV. That’s about 20 percent of the retail price.
Extended warranties can often be bought later, although this varies depending on the provider's terms and conditions. Some retailers or manufacturers allow consumers to purchase an extended warranty any time during the original warranty period.
How much are extended warranties?
Deciding whether an extended warranty is worth the expense is a matter of personal preference. However, generally, financial advisors and consumer advocates suggest that extended warranties may not be the best use of your money.
One reason is that the cost of an extended warranty can be significant, as outlined above. Another is that most products come with a manufacturer's warranty that covers defects and issues for a certain period. This coverage, combined with consumer protections under the ACL, can often provide sufficient safeguard against faulty products. If your credit card already covers you, buying an extended warranty is also unlikely to give added benefit.
Consumer guarantees
These are a comprehensive set of rights and remedies provided by law to consumers for goods and services. The retailer or manufacturer automatically provides these guarantees without any extra cost and cannot be overridden.
Key guarantees include that goods must:
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- Be of acceptable quality
- Fit for their disclosed purpose
- Match their description or any sample or demonstration model
On the other hand, services must be provided with adequate care and skill and fit for a particular purpose or achieve a specific result.
If a product or service fails to meet a consumer guarantee, the consumer has a right to a remedy – a repair, replacement, or refund and in some cases compensation for damages and loss – which is provided by the retailer or manufacturer. The type of remedy will depend on whether the failure is major or minor.
Where consumer guarantees don’t apply
While consumer guarantees apply to most products and services sold to consumers, there are certain exceptions. The Australian Competition and Consumer Commission (ACCC) lists the following:
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- Hiring or leasing a product
- Bundled products and services
- Private sales, where the seller isn’t running a business
- Auctions
- Products from overseas businesses
- Products and services bought before 2011
- Financial products
- Services to transport or store business goods
- Engineering and architect services
Extended warranties
Extended warranties often overlap with consumer guarantees and do not necessarily provide you with any significant benefits above your consumer rights. In fact, they may offer less protection than consumer guarantees, especially considering they usually come at an extra cost. They also often have many exclusions and limitations outlined in their fine print, such as restrictions on your choice of repair centres.
When is an extended warranty worth it?
The only time you should go for an extended warranty is if it provides benefits not already offered by consumer guarantees. The ACCC listed these questions to help you decide:
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- Does the extended warranty give greater protection than your statutory rights under the law? Before buying an extended warranty, ensure it doesn't just replicate the protections your statutory rights already provide. Remember, your right to a remedy when a product fails to meet a statutory condition or warranty has no fixed expiration; it's based on what is reasonable considering the product's cost and quality. This implies that your statutory rights could cover the replacement or repair of defective goods even after a voluntary or extended warranty expires.
- Are there any crucial limitations or prerequisites to be aware of? For instance, is the warranty only applicable if the product is serviced regularly? If it is, and servicing is not free, then it may cost you more in the long run.
- When does the extended warranty start? Some extended warranties begin on the purchase date, not after the expiration of the manufacturer's warranty.
- Is the proposed remedy equivalent to the original price of the product? Be aware that the value of remedies under some extended warranties may depreciate over time. This means you may only receive a partial refund of the purchase price or a lower-value product as a replacement if a problem arises.
- If the product needs to be shipped for repairs, who is responsible for the freight costs?
- Are there certain types of issues not covered by the warranty? Certain extended warranties might not cover accidental or water damage, for example.
Can you cancel an extended warranty?
It is generally possible to cancel an extended warranty, although the specifics will depend on the terms and conditions. Here's what you should know:
Cooling-off period
Some extended warranties come with a cooling-off period, which allows you to cancel the warranty within a certain number of days after purchase and receive a full refund. The length of this period can vary, so check the terms of your warranty.
Under the ACL, if a business fails to comply with the requirements to provide a comparison between the extended warranty and the statutory rights, or fails to inform the consumer about the cooling-off period, then the consumer has the right to cancel the extended warranty agreement within six months from the date of purchase.
Cancelling after the cooling-off period
If the cooling-off period has passed, you might still be able to cancel your extended warranty and get a partial refund. This will depend on the terms of your agreement. Some providers may allow cancellation at any time but may determine your refund based on how long the warranty has been in effect or how much you've used the product.
Process of cancellation
To cancel your extended warranty, contact the company that sold you the warranty and submit a cancellation request. This might involve writing a letter or filling out a form. Send any cancellation request in a way that gives you a record of the communication, such as via certified mail or email.
What if the business refuses to provide you with a refund?
First, try contacting the business again. Clearly explain the problem and the outcome you want, ideally in writing. It's also a good idea to mention your rights under the ACL.
If the business still refuses to refund, you can lodge a formal complaint. You may need to do this in writing. Be sure to include details of the purchase (like the date and place), the problem, and how you would like it to be resolved. Keep copies of all correspondence.
If the business does not respond to your complaint or the issue is not resolved to your satisfaction, you can contact your state or territory consumer protection agency.
And if the problem is still not resolved, you may need to consider legal action.
If you feel pressured or misled into buying an extended warranty
Under the consumer guide, misleading information about extended warranties can result in fines of up to $1.1 million.
If you believe you were pressured or misled into buying an extended warranty, you have several options to lodge a complaint and seek resolution:
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- Approach the business
- Contact your local consumer protection agency, also called state or territory consumer affairs
- Complain to the ACCC.
Now that you know your rights under Australian Consumer Law, don’t fall for the hard sell. If you feel pressured into taking out an extended warranty or are having trouble getting something repaired or replaced under an extended warranty you have already paid for, get in touch with us, and we’ll help you handle it.
