Service Contracts column
When Are Service Contracts a Disservice?
from Consumer Credit Counseling Service of Greater Atlanta
You may have noticed, over the last ten years or so, that nearly every time you buy a product that has the potential of breaking down mechanically, a service contract is available for a small extra charge. Whether you're purchasing a major appliance, like a refrigerator or dishwasher, or buying a small electronic product, like an answering machine or compact disc player, it seems as though there's always a service contract available.
Typically, the contract costs a few dollars extra, depending on the original purchase price, and involves an extension on the warranty. In other words, if you buy $75 answering machine with a 30-day warranty, you may have the option of spending an additional $6 on a service contract, which extends that warranty to a full year. If the answering machine stops working between day 31 and day 365, the company will repair or replace it at no cost.
For the manufacturers service contracts are a significant source of revenues because many people feel they're fairly inexpensive, especially in comparison to the cost of the product itself. After all, if you've just spent $300 on a microwave oven, $20 for the service contract doesn't seem like that much to insure your original purchase.
Unfortunately, the costs of these extended warranties can add up quickly. Consider a young couple moving into a home they've just purchased. Often, this means spending a lot of money in a short period of time on major appliances. If you have to buy a washer, dryer, refrigerator, dishwasher, microwave, and lawnmower all at once, the cost will likely be more than $1,700. If you buy a service contract with each one, you could spend an additional $150. That's a lot of money to spend, especially when the likelihood of something breaking down is fairly small.
In most cases, they aren't a wise option for the consumer. The companies make millions of dollars on service contracts, primarily because they're rarely used. The vast majority of new products work fine for several years, which is longer than the time period covered by most of these contracts anyway. And those products that are faulty from the beginning, typically break down within the regular warranty.
The point here is that it's a numbers game based on averages, both for you and the manufacturer. Overall, the price you pay for a service contract is based on the odds of a particular product breaking down in the first year or so, multiplied by the average cost repair or replacement, with a nice profit at the end. So if you purchase an appliance and only expect it to see average use, the service contract is likely only going to benefit the manufacturer, and not you.
Statistically, if you never buy a service contract on products that will only see typical use, you'll come out ahead in the end. Sure, you may have a product break down once or twice in situations where the extended warranty would have covered it, but the cost of repairing or replacing it will probably be less than all the money you would have saved during that same time period by not buying all those service contracts.
The one circumstance where a service contract may be a good idea is if you feel the product will experience a lot of wear and tear. For example, if have a large family at home, and you're considering a new dishwasher, buying the service contract may actually pay for itself. Or, if you have a large backyard and your teenager cuts lawns on the weekend for extra money, a service contract on the lawnmower might be smart.
Other than that, though, the odds usually aren't in your favor.
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