Service contracts, sometimes called extended warranties, extend a guarantee by increasing the length of time warranty coverage is in place, or by providing additional protection not included in the product guarantee.
These extended warranties act much like an insurance policy, paying off in case something goes wrong with the product. There are pros and cons to these extended warranties that just might factor into your decision whether to pay a little extra for peace of mind, or take your chances with the manufacturer’s standard warranty.
To decide whether or not to purchase an extra layer of protection, conduct a little research.
Deciding to buy an extended warranty
Many service contracts provide the same protection that the manufacturer’s warranty provides, so you may be paying for duplicate protection – money out of your pocket that could be used elsewhere.
Start by reading the manufacturer’s warranty to see what’s covered and what isn’t. If it’s a refrigerator, maybe the icemaker is not covered. Most manufacturers provide some form of guarantee – perhaps a 12-month guarantee that the product will work as advertised – so buying a service contract is duplicate coverage, at least for the term of the manufacturer’s warranty.
Next, determine who will service the product if it should fail to work properly. In some cases, it will be the manufacturer. In other cases, it will be the retailer who sold you the item. There are also third-party guarantors that provide extended coverage. Who is going to fix what’s broken?
How are defective items repaired? It’s something you want to know. If you have to pack up your computer and ship it half-way around the world to get a chip replaced, chances are you shouldn’t sign up for that particular extended warranty.
Service should be convenient. It should also be fast. An extended warranty should have a detailed repair schedule, i.e., same-day service, replacement parts within 48 hours, etc. If we’re talking about a car, that big screen TV, or some other frequently-used product, fixes should be fast, and laid out in the terms of the extended warranty.
Weigh the cost of the extended warranty against the cost to replace or repair the item yourself. If it costs $100 to purchase a service contract on your $349 tablet, it’s probably not money well spent. First, tablets are reliable in general. If there is a problem, it’ll usually show up while the tablet is still under manufacturer’s warranty. In addition, if the tablet does fail in two years, you’re more likely to want the newer, faster, cooler model.
Conduct some research on any big ticket item under consideration. Consumer Reports®, for example, provides unbiased reviews of all kinds of products, with a strong focus on product reliability. Online retailers encourage consumer reviews – reviews that sometimes reveal that a product isn’t reliable in the first place, whether you have a service contract or not.
In general, if the product has a manufacturer’s warranty that provides broad coverage, chances are you won’t need a service contract. However, if an item is used – a car or even a home, for example – an extended warranty may pay for itself the first time you’re hit with a major fix.
Buy good quality, read reviews, check the existing warranty (actually read it), and determine if the cost of a service contract will ever be recouped.
Be smart. Don’t opt in for a service contract under pressure from a relentless salesperson. These extended warranties are money-makers for many retailers and manufacturers because consumers don’t ever have a problem that isn’t covered by the guarantee that comes with product as part of the sale price.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.
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