Extended Warranties and Service Contracts: Extra Protection or Waste of Money?

When you buy cars, computer equipment, major appliances, home electronics or other expensive household items, chances are you will be offered a service contract or extended warranty for an additional fee. Often charged as a percentage of the purchase price, service contracts and extended warranties range in cost from less than $50 to several thousand dollars. While they may seem like a good way to protect your investment and buy some extra peace of mind, consumer advocates generally advise against purchasing this extra coverage and report that it is rarely worth the cost.

Most big-ticket purchases come with a standard manufacturer’s warranty that usually covers the item for a least the first year. More often than not, if a product is faulty, any defects will become apparent during that period and will be covered by the standard warranty. If a product is not defective, problems typically show up much later in a product’s life cycle, beyond the term covered by an extended warranty. In addition, extended warranties often overlap the manufacturer's coverage—you might buy a two-year extended warranty, but with the manufacturer's warranty covering the first year, you are really only receiving one additional year of coverage.

Another reason consumers are discouraged from purchasing service contracts is that they can contain so many conditions, terms and exclusions that they are virtually ineffective. In most cases, you will not have protection from common wear and tear, and some manufacturers do not honor contracts if you fail to follow their recommendations for routine maintenance.

One more thing to consider when weighing the pros and cons of service contracts is credit card coverage. Some credit card reward plans will double the length of a manufacturer's warranty, free of charge, when you purchase the item with the card, making additional coverage unnecessary.

If, however, you do decide to purchase extra protection for a product, make sure you read the fine print in the service contract and ask the following questions to be sure you’re getting the protection you’re paying for:

-  Does the dealer, manufacturer or an independent company back the service contract?

-  How are claims handled?

-  Who will perform the service and where it will be done?

-  What happens to my coverage if the dealer or administrator goes out of business?

-  Is prior authorization required for repair work?

-  Are there any situations when coverage can be denied?