Thinking about buying a service contract with that new car, new refrigerator, or new sound system? Wondering if itís a cost-effective move?

We asked the Federal Trade Commission to help us learn more about service contracts

We know: Service Contracts vs. Warranties

Whatís a warranty?

A warranty is a written promise a manufacturer or seller of a product makes to stand behind the product. It usually provides repair, replacement and/or maintenance service on the product for a specific period time following the purchase. Federal law requires that you be able to read the warranty for the product you are buying before you make the purchase.

Whatís an implied warranty?

Implied warranties are created by state law, every state has them, and almost everything you buy is covered. In general, the implied warranty means the product must do what it is supposed to do, and it is suitable for the purpose or use for which itís being sold.

If the product you are buying does not come with a written warranty, itís still covered by the implied warranty, unless itís marked Ďas isí.

Whatís a service contract (sometimes called an extended warranty)?

Like a warranty, a service contract provides repair and/or maintenance for a specific time period after you buy the product. However, a warranty is already included in the price of the product you buy.

Service contracts cost extra and are sold separately. They are an additional profit-making service sold buy the retailer.

Why buy a service contract then?

Itís a good question. Many people buy service contracts when they donít really need them. So, determining whether to buy a service contract involves taking the time to understand what is covered by your warranty, and then determining if you need additional coverage.

How can I compare the two quickly?

Consider these questionsóand ask the salesperson to answer them if he or she is trying to sell you a service contract:

  • What time period and repairs are covered by the warranty?
  • What time period and repairs are covered by the service contract?
  • How likely is the product you're buying to need repairs, and how much will they cost?
  • Who is offering or backing the service contract? Are they reputable and likely to be in business when you need them? Remember, the service contract is only as good as the company backing it.
  • If you buy the service contract, is there a deductible? Where will you have to take the product for service?

Take some time to think it over.

There's no need to be rushed into a service contract. Take the time to compare the service contract and the warranty-so that you're sure it's a cost-effective deal.

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