Society of CPAs: Be mindful of service contracts

By Johnny Jackson


As the new year dawns, consumers may be preparing to invest in products such as automobiles, or new television sets.

The Georgia Society of Certified Public Accountants (CPAs), however, warns to use caution when considering product-service contracts for large appliances, electronics, and automobiles.

Consumers are often told about the redeeming qualities of having service contracts, in the event their investments need repair. However, service contracts may not be worth the hassle in some cases, according to Robert Prator, a certified public accountant with Tarpley & Underwood, PC, in Atlanta.

"Service contracts are basically insurance policies," Prator said. "You're betting the provider that the product will break before the warranty expires. Generally, insurers know the odds are in their favor. Otherwise, they wouldn't enter the contract."

When people enter into a service contact, they should consider what it covers that the warranty does not cover, and should read the fine print.

"Is the provider reliable - is the contract with the manufacturer or some other entity?" he said. "How do you go about getting a repair under the contract? [And] does the contract have a deductible?"

Longer contracts are generally much more expensive. Consumers should determine whether they plan to use a product for a long time. Also, new or younger consumers should avoid contracts on electronic products.

"You might consider contracts on high-dollar mechanical items [e.g. automobiles, appliances]," he said. "However, be sure to ask the questions ..."

The Georgia Society of CPAs advises that consumers consider exactly what the service contract or warranty covers.

Do not assume a service contract will cover every necessary type of repair or maintenance, they advise. Read the contract carefully, as there may be limitations which will make the contract less attractive.

It is also important to find out if an item purchased has a warranty, and what it covers, so it can be compared to the service contract.

Consumers should also ask whether they can put off buying the service contract until the warranty ends, to avoid paying for the contract until it is needed.

Consider whether a product is one likely to need numerous repairs. For instance, if the last such product lasted 10 years, and never had to be serviced, the new product may not need a service contract.

Conversely, if repairs were needed regularly, and cost more than the contract would over time, opt to have a contract for the new product.