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Is a Service Contract a Waste of Money?

What you need to know before you sign up

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.

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

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. >>

Who will provide the service? A number of third-party companies offer extended warranties. While most are reliable, it's probably better if the extended coverage is provided by the manufacturer or the retailer. There is little or no recourse for consumers who hold service contracts with companies that go out of business.

Check the company's reputation by asking your Better Business Bureau, consumer protection office or state insurance commission about complaints.

Is my new purchase likely to fail? A service contract may be a waste of money if what you're buying is unlikely to need servicing. Although there is no consensus among the experts on which appliances deserve service contracts, here are some generalities that are widely accepted:

  • Central air conditioners, because of the high cost of repairs and their essential need in hot weather, are popular candidates for extended warranties. So are mechanical appliances that do hard physical work and have lots of moving parts, such as clothes washers and dishwashers. "Clothes dryers have lower failure rates and usually don't need coverage by a service agreement," says Landers.
  • Modern electronic products such as flat-screen television sets have become so reliable that extended warranties are seldom worthwhile. A TV set that makes it past the manufacturer's one-year warranty without a failure is likely to continue on for years without a problem. Among the exceptions in this category are laptop computers. Because of their portability and exposure to damage, you may want to consider an extended warranty.
  • When it comes to new cars, the trend toward greatly extended original warranties is making the cost of service contracts an unnecessary expense in most cases.

You may also like: Have a complaint for customer service? >>

William J. Lynott is an author and freelance writer who specializes in business and financial issues.

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