When does buying a service contract make economic sense?
The average service contract costs the dealership very little but they frequently sell for thousands of dollars. Unless you are absolutely sure that you are going to keep a new vehicle for years beyond the manufacturer’s warranty—and manufacturers’ warranty terms are getting longer—then extended service contracts don’t make financial sense for most people. Many extended warranty terms, for example, overlap with manufacturer’s warranties but the consumer can’t make a claim against them until the manufacturer’s warranty expires. So you might think that you’ve bought a six-year service contract, but the policy doesn’t kick in until the manufacturer’s warranty runs for 5 years or 50,000 miles. In effect, you’ve paid big bucks for a one- or two-year contract. Some service contracts also cover only limited repairs. If you are buying a used vehicle that is no longer under the manufacturer’s warranty, then a service contract may be more useful. But just as with a new vehicle, you must check ou
