Five Questions About: Extended warranties

How do extended warranties work?

They are usually sold alongside domestic appliances such as washing machines or TVs, in order to provide protection if they break down after the guarantee expires.

What's the problem with them?

This type of cover can sometimes cost half as much as the appliance itself. Some warranties include protection against accidental damage or theft – things usually already covered by home insurance.

In addition, products are now generally very reliable, which means often these policies end up being a waste of money. The Financial Ombudsman upholds two thirds of complaints about them in the consumer's favour.

Why is the Office of Fair Trading looking at them?

A study by the OFT found that there isn't enough competition in the market, and that only a quarter of consumers shop around for extended warranties. Shoppers also aren't given enough information to help them decide if an extended warranty offers value for money.

What's being done to improve things?

Dixons, Comet and Argos, the biggest suppliers of extended warranties, have agreed to introduce an extended warranties comparison website, to make shopping around easier. They have also pledged to provide more information about warranties through in-store leaflets, which will include information about alternative providers.

What happens next?

The OFT will consult on whether to accept these undertakings. If it decides not to, then the market will be referred to the Competition Commission for a detailed investigation.