Kayla Carrick

Hard times have more consumers buying warranties to protect big purchases

By Kayla Carrick
Bloomberg News / August 22, 2009

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Tracy Busch bought a new Dell laptop for $599 this month and a $99 extended-service contract. She is wary of repair costs after being unemployed for 14 months. “This is a major purchase for me,’’ said Busch, a Long Island City, N.Y., resident, who’s starting a new job in banking. “I have to protect it.’’

A study by the Journal of Consumer Research found that people with lower incomes are more likely to purchase a warranty because they worry more about the costs of repair or replacement, according to Ajay Kalra, a marketing professor at Rice University in Texas who worked on the study. Kalra said he looked at 1,676 purchases which included 553 sales of extended-service contracts from one retailer. “When you’re rich, you can just go out and buy new products,’’ Kalra said. “In this economy people are going to hold onto their purchases for a long time.’’

Consumers spent $8.3 billion in 2007 on warranties for electronics and appliances, according to the Warranty Week site.

Coverage for repairs has grown amid the recession, warranty-service providers and retailers said. So-called attachment rates, or the percent of people who add a service contract to their purchase, have increased by 10 percent this year, said Tony Nader, chief executive of N.E.W. Customer Service Cos. The company oversees service plans for retailers including Wal-Mart.

In 2008, 42 percent of consumers bought a warranty for their computer, an increase from 37 percent in 2007, according to David Daoud, an analyst with IDC in Framingham.

Consumer advocates such as Consumers Union, publisher of Consumer Reports magazine, and the Consumer Federation of America advise against purchasing extended-service contracts.

Mark Kotkin, director of survey research at Consumer Reports’ national research center, said extended-service contracts are “a bad bet,’’ because the chance of needing a repair during the coverage period is small and warranty prices are similar to the cost of the average repair.

Many repairs are covered by the standard warranty offered with the product and many products rarely break within the extended-warranty window, Kotkin said. Three-year-old laptops had a 36 percent repair rate, and three-year-old digital cameras had a 9 percent repair rate, according to Consumer Reports.

“If you feel you must have an extended-service contract, be sure to check with the Better Business Bureau to find out how they are rated,’’ said Jack Gillis, director of public affairs for Consumer Federation of America.

Consumer Reports recommends shopping around when purchasing a warranty, and advises not to pay more than 20 percent of the product’s purchase price. Consumers should ask if the extended warranty includes in-home repair or pickup for heavy items and if it contains a lemon clause, which replaces the product if it can’t be repaired.

Kayla Carrick is a reporter for Bloomberg News.