December 22 - Questions To Ask About Service Contracts
| Is it a good idea to buy a service contract when you are making an important purchase? According to the Federal Trade Commission, roughly 50% of the people who buy new or used cars or major appliances purchase service contracts. These agreements cover repairs or maintenance that may be necessary to your car or appliance. But you should be prepared to ask a lot of questions before you sign up for one, according to the Georgia Society of CPAs. They offer this advice on what you need to know. WHAT DOES THE CONTRACT COVER? Don’t assume that the service contract will cover every type of repair or maintenance that you may need. Read the contract carefully to see what parts or services are covered and in what circumstances. There may be limitations that will make the contract less attractive. WHAT DOES THE WARRANTY COVER? Many car makers and product manufacturers offer warranties that guarantee their products for a certain period of time. A service contract generally extends the terms of the warranty, making it last longer and, in some cases, cover repairs and maintenance in more situations. The difference is that the warranty is free, but you must pay for the service contract. That’s why it’s important to find out if the item you’re buying has a warranty and what it covers. Compare the warranty and service contract carefully to see how they differ. You may decide that the warranty is sufficient for your needs, which will save you the cost of the service contract. CAN I BUY THE CONTRACT LATER? Ask whether you can put off buying the service contract until the warranty ends. That way you won’t be paying for the contract until you really need it. HOW OFTEN WILL THE PRODUCT NEED SERVICE? A service contract is like an insurance policy, and it does offer some reassurance that your costs are covered in case of a breakdown. However, it’s a good idea to consider whether the product is one that really will likely need a lot of repairs. If your last dishwasher lasted 10 years and never had to be serviced, maybe it’s not necessary to pay for a service contract for your new one. If you will make regular payments on the contract over time, add up your total costs, then decide whether your repair costs will likely be more than that amount. If not, it’s best to forego the contract. WHAT ARE THE SERVICE TERMS? Some service contracts are offered by the local dealer or retailer. That means that you may not be able to get service if you move. You’ll also want to know if the contract requires the seller to provide service within a certain timeframe. If not, you may end up at the end of a long repair list and be forced to pay for service offered by another provider. WHAT ARE YOUR COSTS? The contract may not cover everything. For example, you may have to pay a fee or deductible each time you use it. Certain items may be excluded, such as towing if your car needs repairs. You may also have to pay a cancellation fee if you decide to end the contract before the term is up. CONSULT YOUR CPA Clearly there are a number of questions you should ask if you are going to sign up for a service contract. When you have questions about any financial issue, remember that your local CPA can help. He or she can provide the advice and insights you need. # # # Produced in cooperation with the AICPA. ©2008
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