Financial Advice

Extended Warranties & Service Contracts

Extended Warranties & Service Contracts

You've just bought a new computer. Maybe you've purchased your first car or a new refrigerator for your newly renovated kitchen. However, before the clerk or dealer finishes the transaction, you are asked if you want to pay extra for an extended warranty, also known as a service contract.

The big question: Should you shell out these extra dollars? You might be surprised at how often your answer should be "no."

Service contracts or extended warranties provide free repair or maintenance services for a set number of years. They are not the same as a standard warranty. A standard warranty, which also provides free repairs or maintenance for a set number of years, is included in the purchase price of the product. An extended warranty on a new car, though, provides extra protection for when the standard warranty would end. For instance, a service contract might entitle you to free repairs for your car for an additional five years after your standard warranty expires. A service contract might mean that you will not have to pay a repairman should that new furnace you just bought break down in the next eight years.

Taking out one of these extended warranties or service contracts, then, sounds like a smart financial move. After all, car repairs or fixes to major appliances are not cheap. However, you'll have to consider several important questions before you decide if paying extra for a longer warranty or service contract makes financial sense.

First, study the existing warranty, the one included in your product's purchase price. If this warranty is already a long one -- say your new oven comes with a five-year warranty as part of the price -- you might not need to purchase an extended warranty or service contract.

Look, too, at the cost of these extra contracts or warranties. Often, this added protection can be quite costly. You'll have to determine, then, how likely you are to need enough service or repairs to cover the cost of the extended warranty. No one can predict the future, of course. You do not know if you'll drop your new laptop while walking up the stairs. You cannot predict if your new refrigerator will suddenly go on the fritz. If you read reviews in consumer magazines and from users, you can tell how reliable an individual product is. If it is unlikely that your new product will need repairs within the service contract's lifespan, then you should probably pass on the extra protection.

You also need to take a close look at the terms of the service contract that a retailer or dealer is offering you. Many times, these contracts contain fine print limiting the type of repairs or maintenance that they'll cover. Your new desktop computer might fritz out. When you call the manufacturer, you might find that, for some arcane reason, your extended warranty does not cover labor costs associated with the repair.

Service contracts might also include language that denies coverage if you have not followed the company's maintenance rules. Other contracts only cover particular parts of your new product. Remember, service contracts are money makers for companies. Many will do whatever they can to limit the amount of coverage they actually provide to their customers.

Another recommendation? Make sure you know who will handle any claims that you make. Sometimes the retailer from which you purchased the product will handle the repairs to a damaged item. Other times, you'll have to ship your damaged product to the manufacturer, a process that can extend the amount of time before the product returns to you.

The Federal Trade Commission provides one last piece of advice: After you bring your new oven, car or dishwasher home, be careful if a telemarketer calls to ask if you'd like an extended warranty. Often these callers are not affiliated with either the retailer from which you purchased the product or the manufacturer of it. Often the extended warranties offered by these unrelated businesses are even less useful than the ones provided by bigger-name retailers or manufacturers.

Consumer advocates often recommend that you skip extended warranties or service contracts, mainly because these products are rarely worth the money. The vast majority of consumers will not use their extended warranties often enough to warrant spending money on them. A better option? If you are a disciplined saver, take the dollars that you would have invested in a service contract and deposit them in a savings account. You can then use these funds to handle repairs if your refrigerator, washing machine or laptop should break down.