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.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.
  • The National Council of Higher Education Resources (NCHER) is the nation’s oldest and largest higher education finance trade association. NCHER’s membership includes state, nonprofit, and for-profit higher education service organizations, including lenders, servicers, guaranty agencies, collection agencies, financial literacy providers, and schools, interested and involved in increasing college access and success. It assists its members in shaping policies governing federal and private student loan and state grant programs on behalf of students, parents, borrowers, and families.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.