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Is a Service Contract a Waste of Money?

What you need to know before you sign up

by: William J. Lynott, from: AARP Bulletin, December 21, 2011

The next time you buy a home appliance, a piece of electronic gear or a new car, you'll almost certainly be asked to purchase something called a service contract, maintenance agreement or extended warranty.

Regardless of what they're called, they are all a form of insurance and, like all insurance, they may or may not be a good deal for you.

See also: Extended-service plan tips.

A service contract may be worthwhile for larger home appliances such as dishwashers, washers, heating and cooling systems.

A dishwasher is a popular candidate for an extended warranty because it does hard physical work and has many moving parts. — Photo by Getty Images

Keep in mind that salespeople are motivated by generous commissions to sell them.

In many cases, you would do well to resist. Here are some points to consider as you decide whether to sign up.

How much will it cost? One consideration is how the contract's cost compares with the price of the appliance. Paying $25 for a policy on a small appliance worth $75 makes no sense.

"If the cost of the agreement is no more than 20 percent of the product cost and provides at least two years' protection in addition to an original one-year warranty, it's reasonable to consider," says Dean Landers, owner of Landers Appliance in Baltimore. "I seldom recommend a service agreement on any product that sells for less than $400."

Am I paying for duplicate coverage? Find out exactly when the manufacturer's warranty ends and when the extended period will begin to ensure that you're not paying for duplicate coverage.

What's covered and what isn't? Most service contracts have specific limitations on what they cover. Don't assume that the contract will provide the same coverage as the original warranty — it probably won't. Check to see whether it includes labor as well as parts. Ask whether there's a time frame to commit to the contract — it's a good idea to take a copy home to read carefully.

Will my credit card provide coverage? Some credit cards give you extended coverage on certain purchases — check to see whether yours does.

Next: These appliances may need service contracts. >>