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InvestorPlace.com's Reeves: Extended Warranties a Waste for Most Consumers

By Michelle Smith   |   Wednesday, 27 Aug 2014 02:22 PM

Consider the details before you purchase a so-called extended warranty on big-ticket items because in many cases, it really isn't worth it, warns Jeff Reeves, editor of InvestorPlace.com.

A warranty is a guarantee a retailer or manufacturer provides to a consumer who is willing to shell out significant amounts of cash. The warranty assures the consumer that they have a safeguard if they purchase a defective product, Reeves explains in an article for USA Today.

Additional coverage, which is commonly marketed as an extended warranty, is actually a service contract. The Federal Trade Commission views it as an agreement for continued service, at an additional expense.

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These extended service contracts are wholly separate from any other purchase guarantees. And that's one reason they're often a bad deal.

"Consumers who confuse a warranty with a service contract can underestimate both the quality of their coverage, as well the amount of money they will end up spending out-of-pocket on these plans," he states.

"And in some cases, they may not realize they are paying for coverage they already have free of charge."

For example, say you purchase a two-year extended warranty. Most major appliances and electronics are already covered for one year by the manufacturer.

Many credit cards, such as American Express and Visa Signature, also provide extended coverage, Reeves notes. In many cases, they will guarantee products for an additional year if you're willing to make the purchase with their card.

"You have to be rather lucky — or unlucky — to have problems in the narrow window after your free coverage lapses but before your service contract coverage ends," he adds.

Car dealers are well-known for peddling extended warranty. But the typical warranty for a new vehicle is three years or 36,000 miles. That covers every component on the vehicle except wear items, such as brakes, windshield wipers and tires, and some of these items are even covered for one year or 12,000 miles, The Huffington Post reports.

If you're considering additional vehicle warranty, you need to be especially vigilant about the terms, especially what's included and excluded from that coverage.

Then, consider how much it will cost you. The more miles on the vehicle, the more likely it is to need a major repair, so the more expensive it will be to purchase coverage, Huffington Post explains.

Also, think about how much you'll have to pitch in for deductibles and where the vehicle will be serviced. If the coverage has a limited network of repair shops and the wrong thing breaks in the wrong part of town, you may be on your own, Reeves notes.

Consumers often consider service contracts, or extended warranties, as a way to avoid hefty replacement or repair costs. While the agreements might prevent you from getting hit with a major one-time cost, when you add up the up-front costs of the coverage, monthly fees and deductibles, in many cases you really aren't saving.

And if you haven't read the fine print, you might have done little more than give your money away because your problem might not be covered at all.

"The devil is in the details," Reeves quips.

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