Extended Warranties and Service Contracts
If you’re buying a car, an electronic device, or a major appliance, you may be offered the chance to buy an “extended warranty” or service contract. Both service contracts and warranties provide repair or maintenance for a specific time. But there's an important difference: a warranty is included in the price of an item; a service contract costs extra. It's an add-on that might not be worth the price.
Some service contracts duplicate the warranty coverage that the manufacturer provides; some cover only part of the product; and some make it nearly impossible to get repairs when you need them.
Here are a few factors to consider before deciding to buy a service contract.
- Is the Product Likely to Need Repairs?
- Does the Service Contract Really Provide Extra Coverage?
- How Are Claims Handled?
- Who Is Responsible for the Contract?
- Is There a Better Option?
- A Warning About “Cold Calls”
Is the Product Likely to Need Repairs?
You may not benefit from a service contract if the product isn’t likely to need repairs or if the potential cost of repairs is low. Check websites that offer information about products that are most likely to need expensive — or extensive — repairs.
When you're shopping, compare specific manufacturers and products. If you buy a reliable product from a company with a good reputation, a service contract might not be necessary.
Does the Service Contract Really Provide Extra Coverage?
Before considering a service contract, make sure you know what your warranty coverage is. Compare the warranty coverage to the service contract to see if there’s any benefit to additional coverage.
Read the costs and terms of the service contract. If you’re shopping online, look for a hyperlink to the terms, and save a copy so you can refer to them later.
Depending on the terms, a service contract could last less than a year or more than five. Accidental damage may not be covered. And there may be clauses that allow the company to deny coverage if, for example, you don’t follow their instructions for routine maintenance.
A service contract might cover specific parts of the product or specific repairs. If the terms don’t list a part or a function as specifically covered, assume that it’s not.
Keep in mind that you may have other expenses, like a deductible or a fee each time the item is serviced. You may be required to mail the product to a repair center — so consider shipping costs. Some service contracts set reimbursement amounts. For example, auto service contracts may not completely cover towing or rental car expenses. In addition, you may have to pay a transfer fee if you sell the product.
How Are Claims Handled?
Find out if the retailer or someone else takes care of the repairs. What’s the process for a claim? For example, would you return the item to the store where you bought it?
If a local retailer or dealer offers the service contract, you may be able to get local service only. Consider the possibility that problems may develop while you are traveling or after you move away.
Who Is Responsible for the Contract?
The FTC often gets letters from consumers who ask what they can do if they have a service contract with a company that goes out of business and cannot repay claims. Unfortunately, there is little you can do if that happens. Before you sign a contract, think about the company's financial situation and consider whether the business is reputable:
- Look for an address and a phone number for questions or problems.
- Do an online search with the name of the company and words like “review” or “complaint” to see if there are negative reviews of the company.
- Call your state consumer protection office and ask if they have any complaints against the company.
Is There a Better Option?
Some consumer advocates suggest that people are better off skipping extended warranties, and putting the money they would’ve spent in a savings account. If you need repairs, you’ll have your savings to fall back on. And if you don’t need repairs, you’ll have a little extra money in the bank.
A Warning About “Cold Calls”
Many extended warranties are offered at the point of sale, but sometimes marketers call or send mail long after you’ve made a purchase. More than likely, these pitches are from unrelated businesses. If you respond to them, you’re likely to hear high-pressure sales tactics, as well as demands for personal financial information and a down payment, before you get any details about the service contract. And if you buy a service contract from a telemarketer, you may find that the company behind it won’t be in business long enough to fulfill its commitments.