A consumer purchasing a new dishwasher or refrigerator these days—or a new piece of computer or electronic equipment—can't get out of the store without being asked to buy an extended warranty. Or the store may call these warranties an "extended service plan" or "service contract." By any name, these plans offer to give you "peace of mind" against future repairs for a set number of months or years for a set price. The impending expiration date of the manufacturer's original warranty brings another flurry of phone and mail offers. Can such plans be a good value?
If you want to save money on repairs, most consumer advocates say that extended warranties or service contracts are generally a way to waste money rather than save it. Should you be interested in an extended warranty/service contract for other reasons, make sure you check out the offer thoroughly. Be sure to read the contract carefully, including fine print, before signing. Getting answers to the following questions can help you make a sound decision.
What exactly does the extended warranty cover? And what doesn't it cover?
Extended warranties are a form of repair coverage. Don't assume that an extended warranty will pay for everything. For example, you may have to pay for labor, parts, or shipping. Most plans have limits and exclusions—repairs, services or costs they won't pay for. The plan also may or may not cover regular maintenance.
When does the extended warranty begin?
Does it pick up when the manufacturer's warranty ends or does it run concurrently? If it runs concurrently, what does it cover that the manufacturer's warranty doesn't? You don't want it to duplicate the manufacturer's warranty.
How long does the plan run?
If you are buying an appliance that can be expected to give 8 or 10 years of good service, and your plan runs for just 3 years, what about those remaining years? Ask if the plan is renewable and what the renewal will cost. Note that the cost of an extended warranty/service contract tends to rise dramatically the older the appliance gets.
Is the contract being offered by the store, the manufacturer, or a third party?
Does it remain valid if you move? Can you transfer it to a new owner? Is the contract backed by a reputable manufacturer or company? If the seller goes out of business, will your contract then be worthless?
Where will the appliance or equipment be serviced?
Do you have to bring it in for service, send it somewhere for service, or can it be serviced in the home? Are you prepared to have to ship that computer away, for instance, when there may be excellent repair services in your city?
What occurrences or actions void the contract?
For example, if you drop that laptop or the flood in your basement shorts out the washer, are you covered or does your "negligence" make the contract void?
What is the cost of an out-of-warranty repair?
Most people don't know exactly what's wrong with equipment when it needs repair. If the problem is not covered by the warranty, what does the company charge for those repairs? Sometimes the out-of-warranty terms are very high.
What is the repair record of the product?
If the product has a history of needing repairs, then you may wish to consider purchasing a product with a better repair record even if it costs a little more, rather than spend the money on an extended warranty.
Will you remember you have it?
No more than 20% of extended warranties are ever used. That's why retailers are so eager to sell them—they are a great profit center.
Does the contract have automatic renewal?
Reject this option if possible. If you can't say no to automatic renewal, don't sign up for that particular plan. Don't assume that if you don't pay, the contract will be canceled. Some companies treat renewals like purchases, and if the bill isn't paid on time, penalties accrue until the bill is paid. The cancellation process should be specified in the contract. Always cancel the contract in writing and address your letter to the person and address specified in the contract.
Money Matters Recommendation: Rather than let the warranty company earn interest on your money—for repair services there's an 80% chance won't be used—set aside a similar amount in a savings account where it earns interest for you.