Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Warranty

What it is:

A warranty is a guarantee, usually written, that a product or service works as expected.

How it works (Example):

For example, when you buy a new car from a car dealer, the warranty states that the car works. If the car doesn't work, the warranty gives the owner the right to have the dealer fix the car under certain conditions (length of time, cause of damage, etc.). These conditions are typically spelled out in the warranty. In many cases, consumers can buy extended warrantees from manufacturers, sellers, or third parties.

A warranty can exist even when it's not in writing (that's called an implied warranty). For example, when you order a hamburger at a restaurant, it comes with the implied warranty that it is edible. The Uniform Commercial Code (UCC) contains an "implied warranty of merchantability" that states that in every sales transaction, the good sold must be fit for the ordinary purposes for which the good is used, would pass without objection in the trade, is adequately packaged and labeled, and reflects the promises made on the label.

Sometimes an implied warranty also exists when the seller knows what the buyer is going to use the good for and the buyer relies on the seller's judgment when choosing the goods. If the buyer is a knowledgeable buyer, however, the implied warranty doesn't always exist, especially if the buyer knows as much or more about the product than the seller does.

Why it Matters:

Warranties protect consumers from purchases involving products or services that are defective or are not what was represented by the seller. They are often the legal mechanism behind why consumers can usually return defective products to merchants for a refund. Sometimes, sellers will disclaim an implied warranty at the time of sale (though they have to do this in writing and usually in boldface print).