Service contracts versus warranties: What’s the difference?

What to consider before purchasing a service contract.

Many of us can relate to being put on the spot at the check-out counter regarding whether or not we want to purchase a product-related service contract. This can be a difficult choice, especially when the cashier is eagerly awaiting your decision. Before making an impulse-choice that you may regret, Michigan State University Extension recommends that you educate yourself on the difference between service contracts and warranties.

Service contracts and warranties both provide some element of repair or maintenance for a specific period of time. The main difference is that warranties are included in the purchase price and service contracts cost extra. Service contracts, also known as extended-warranties, can vary greatly and may not be worth the extra money. Some duplicate what is covered in a warranty, only cover part of the product and have so many stipulations it is difficult to get the repairs when you need them. Consider the following before purchasing a service contract:

  1. The product: Are repairs likely? What will potential repairs cost? Am I buying a product from a reliable company? Review websites that provide information on potential product repairs and the costs associated with them.
  2. What does the service contract provide: Does it provide coverage beyond the warranty? How long does the service contract last? What is covered and what isn’t covered? Are there deductibles, service fees, shipping costs or reimbursement limits? Are there clauses that deny coverage and is accidental damage included? Are there transfer fees if you sell the product?
  3. Who handles the repairs and are they reputable: Make sure that you have the company contact information should you have questions or problems. Research the company name online and look for reviews or complaints. Contact your state consumer protection office to see if they have received any complaints regarding this company. It’s important to note that if you purchase a service contract from a company that goes out of business and cannot honor claims, there is little that consumers can do. The Federal Trade Commission often receives letters from consumers who have had this unfortunate experience.

An alternative to service contracts or extended warranties suggested by some consumer advocates include putting the money you would have spent into a savings account, so that the money is there should you need a repair down the road. Lastly, be cautious of “cold calls” or mail from telemarketers offering extended warranties. These companies are not usually affiliated with the company you made the purchase from, often engage in aggressive sales tactics that demand personal information and immediate payment, and these businesses often close before they honor there warranty coverage commitments.

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