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Service Contracts are Sometimes a Disservice
The MMI Online Articles are designed to inform, assist, educate and alert consumers.
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If you buy a product that has the potential of breaking down mechanically, you probably have the option to insure your purchase. In fact, extended service contracts are offered on everything from cars to cell phones. To many, a relatively inexpensive service contract seems like a good way to protect their investment. According to the FTC, an estimated 50 percent of all new car buyers, and many used car and major appliance buyers, purchase service contracts.
Typically, the contract costs a few dollars extra, depending on the original purchase price, and involves an extension on the existing warranty. In other words, if you buy a $75 answering machine with a 30-day warranty, you may have the option of spending an additional $6 on a service contract, which extends that warranty to a full year.
Unfortunately, the costs of service contracts can add up quickly. Consider a young couple moving into a home they’ve just purchased. Often, this means spending a lot of money in a short period of time on major appliances. If you have to buy a washer, dryer, refrigerator, dishwasher, microwave, and lawnmower all at once, the cost will likely be more than $2,000. If you buy a service contract with each one, you could spend an additional $200. That’s a lot of money to spend, especially when the likelihood of something breaking down is fairly small. When determining whether or not a warranty is worth the extra cost, the experts at Money Management International offer the following advice.
Determine your comfort level. For some people, the peace of mind is worth the increased cost. Also consider if you would be able or willing to pay repair costs if they became necessary.
Think about how the item will be used. If you purchase an appliance and only expect it to see average use, the service contract may only benefit the manufacturer. The majority of new products work fine for several years, which is longer than the time period covered by most of contracts.
Compare warranties. Read the existing warranty to see if additional coverage is even necessary. Look for duplicate coverage to be sure that you are not paying for the coverage twice.
Read the fine print. Investigate return policies, shipping charges and taxes. You will also want to check delivery dates and review warranties.
Figure out the total cost. Some warranties also have deductibles, making the warranty more costly. Other services charge a fee each time the warranty is used.
Shop around. Warranties are offered by manufacturers as well as third party providers, so it pays to compare costs and services. Check with the Better Business Bureau to assure that you are working with a reputable company.
If you are unsure whether or not an extended warranty is worth it, buy yourself some time. In many cases, you can purchase a warranty at a later date.
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