A service contract is an agreement between a service provider and a buyer that defines the services the provider handles over a specified period. For example, a three-year service plan can be purchased to cover any repairs or maintenance needed during that period.
When purchasing a large-ticket item such as large furniture, an appliance, a car or an expensive electronic device, most vendors offer either an extended warranty or service contract that covers service repairs and maintenance for a specified amount of time. Warranties are more often than not included in the purchase price of an item, but service contracts are add-on purchases. For example, when buying a new couch, the couch may have a limited factory warranty, but the store might offer an extended service contract that will cover any repairs or replacements needed during the term of the agreement not covered by the warranty.
Service contracts should provide a clear scope of the agreement, address any legal concerns or liabilities for the parties, define the term of the agreement, and include any information about the cancellation of the agreement. The majority of the time, warranties are offered by the original provider of the good or service, but service contracts are offered by vendors selling another company's goods or services. Warranties and service contracts can be handy in some circumstances, but they can also be a waste of money and a hassle. Sometimes it's a better option to place the money that would have been spent in a savings account to have the funds more easily accessible and accrue interest over time.