Service contracts are sometimes a disservice

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. Following are a few things to consider when determining whether or not a warranty is worth the extra cost.

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. Also, if you pay for an item by credit card, find out if the creditor offers their own form of coverage.

Read the fine print. Coverage may only apply for certain parts of the item. Most contracts will not cover repairs if the item has not been properly maintained.

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.

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.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.