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Home Equity and Refinancing

How do you create a prorated warranty?


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August 30, 2007 7:08PM


Manufacturers who would like to extend their warranty, more from a product `attractiveness` angle will offer a prorated warranty. It's another way of saying that they'll cover the warranty 100% for a short period, but as the product ages, they'll assume less and less responsibility for the quality of their product over time and you, the consumer will start to have to bear a greater portion of the repair bill as time passes.

Prorated warranties can range from as short as a year to three years on average. For instance, the manufacturer will cover 100% of the costs of repair (usually minus shipping) for a period of maybe one year. Then for the next two years, the portion that they'll cover becomes less and less until by the end of the third year, you will bear 100% of the repair costs.

They usually do this based on the expected value of the unit projected over a period of time, and usually based on past history from previous models and past performance.

To create a prorated warranty for an item is an enticement to purchase, giving the consumer a sense of security from the manufacturer. It's also a good way to capitalize on an extended warranty plan from the retailer because they know that for the same reason, they will; be reimbursed a portion of their costs should the consumer need to use the extended warranty plan.

The only problem with the extended warranty plan is that it almost always runs concurrent with the manufacturer's warranty, providing full reimbursement for the manufacturer's 100% warranty period and the retailer can pocket that money as pure profit. Not so good for the consumer, but plenty lucrative for the extended warranty companies.

So if you want to create a prorated warranty you have to take into consideration the quality of your product (how long will it last before repairs are expected), what your product is and how it'll be used as well as the expected repair costs over say, a one to three year period.

Some manufacturers will cover items 100% for 90 days and then prorate for the first full year. Others will extend the period up to three years and some, even longer.

Hope this Helps,