Maintenance contracts: peace of mind at what cost?

Ever had an oven break down 48 hours before you needed to cook the Christmas turkey, or a car that gave up the ghost just two days before you were due to leave on holidays? You may have wondered whether a maintenance contract would have helped solve the problem quickly and without significant unexpected expense. That may well be, but it’s worth calculating the real cost of the relative peace of mind offered by such contracts – myLIFE has considered this issue for you!

Why do things always break down at the worst possible time? In the examples given above of the oven or the car, you will be burdened with unexpected costs at a time when your budget has probably already taken a hit from Christmas shopping in the one instance, or a hotel reservation or similar in the other. It will cost you money, and it adds insult to injury if the repair person or mechanic reminds you that you would have had nothing to pay, had you taken out a maintenance contract – you should have thought about it earlier.

Contradictory tendencies

We all tend to live in the present and struggle to think ahead and act based on what we would prefer for the future. This is particularly the case when it comes to predicting the real cost of ownership, which includes not just the immediate cost, but also the thorny issue of probable or obligatory future expense, such as car maintenance costs.

In addition to this tendency to live in the present, we also have an aversion to loss. Felt as psychological pain, we don’t consider expense acceptable unless it offers sufficient satisfaction in return. For example, paying for your holidays in advance is acceptable, as you can dream about lounging in the sunshine by the seaside. On the other hand, it is painful to have to pay for a new oven when the old one no longer works after just five years.

It’s therefore easy to understand why it’s hard to put money aside for unexpected expenses in the future, which bring us no satisfaction but merely enable us to repair or replace something that no longer works. It’s not easy to set up precautionary savings. Rather than hurrying to set aside some money to replace our PC that is starting to show signs of weakness, our aversion to loss helps convince us that it will last a few months more. This thought provides momentary comfort, but what would the consequences be if your PC were to break down in a month’s time, just as you were preparing to submit an important report? We are unable to predict the future, and most of us prefer to avoid the fear of this uncertainty by not thinking about it at all, rather than working through worst-case scenarios.

On the one hand, we are afraid to consider difficulties in the future, on the other, we like predictability.

One way of avoiding having to think about these issues, is to reduce uncertainty by establishing a certain degree of predictability. We are afraid to consider difficulties in the future; we like predictability. One solution is to try and “tame” the unpredictable nature of the future. Manufacturers have understood this and it is one reason why most expensive consumer goods today offer various guarantees and insurance options. That’s all well and good, but these guarantees cover a limited period and do not always cover all breakdowns. And just as our devices are getting a bit older and are no longer under guarantee, the risk of them breaking down is higher. While a guarantee offers sufficient reassurance for some of us, others tend to worry more and are prepared to go the extra mile to preserve their peace of mind.

Maintenance contracts – sometimes, but not always, the right choice

Car manufacturers and, more recently, household appliance retailers have met this desire for predictability with maintenance contracts that aim to provide peace of mind. Originally, maintenance contracts came from the world of leasing, long term rentals, where they were attached to the rental of a vehicle of industrial machinery. For a regular payment (usually monthly) such contracts cover certain scheduled maintenance costs, including spare parts and labour costs. They may sometimes include cover for certain breakdowns. In general, several service levels are offered. The more you pay, the greater the cover against “unexpected” events. So in the future, you don’t need to worry about maintenance or breakdowns, which is a blessing if you have a high desire for clarity and predictability. On the other hand, it is likely to be your finances that suffer.

Let’s show you why using the following example. You’ve finally paid the last instalment on your car loan and are delighted by the cash that this frees up every month. Yet barely a month later, your vehicle reminds you that a rather costly service – which you had completely forgotten – is due. As you pay the bill, the garage mentions that had you had a maintenance contract, this work on your vehicle would have been included and would have cost you nothing. As you don’t want this to happen again, you decide to go ahead and sign the contract. Is it really a good idea?

A maintenance contract may be a good idea if you know what it covers and you can compare this to what it costs.

In principle, a maintenance contract may be a good idea if you know what it covers and you can compare this to what it costs. You should never be seduced into undertaking monthly payments for the sake of your peace of mind without assessing whether these payments are relevant. Of course, services become more expensive as your vehicle ages, but there’s nothing to stop you saving for these costs rather than paying for a maintenance contract. In contrast to what the garage is suggesting in this example, just because there is nothing to pay for the service itself doesn’t mean that it is free with a maintenance contract. You pay for it via your monthly payments. And these monthly payments may ultimately prove more costly than the various work required on your vehicle and covered by your maintenance contract.

If you don’t cover great distances with your car, services will be less frequent and it may be better to prepare for these by setting aside a little money, rather than taking out a maintenance contract. Check it out – a good garage will be able to give you an indication of the services that will be required based on the age of the vehicle and the distances covered. As far as unexpected events such as major breakdowns or accidents are concerned, you will in any case contact your insurer or a recovery service. If you cover a lot of distance with your vehicles and use them to the very end of their useful lives, it is undoubtedly worth considering an appropriate maintenance contract.

Hopefully it is clear that we are not for or against these contracts, we are merely trying to point out that they do not necessarily suit all situations.

How to choose?

It is possible to make an informed decision, providing that you study the contracts in detail and make the appropriate calculations to figure out what is really the best option for you. If this is too complicated and you are happy to pay for your peace of mind, the best option is undoubtedly to consider an operational lease. This type of contract includes use of the vehicle, insurance and services and gives you the option of taking out a new contract on another new vehicle at the end of the defined lease period.

Greater caution is required with long-term lease agreements for household appliances. This type of deal is very fashionable but you don’t have the option of purchasing the equipment at the end of the contract. Either you take out a new contract, which will likely be more expensive, for new equipment, or you extend the existing contract and will end up paying as much if not more than the purchase price for the appliance without ever owning it.

Before taking a decision, it’s also important to consider the environmental aspect. These contracts tend to promote consumption and the replacement of appliances that are still in good working order. That’s not very green!

In summary, maintenance contracts can be very useful and are sometimes indispensable for goods that require regular servicing by an expert to ensure that they operate properly. This is the case with a boiler, for example. In other circumstances, you should study the costs and opportunities of such contracts in great detail: they are useless for new vehicles which are often under guarantee and usually require only minor interventions such as oil changes. Of course, it is impossible to exclude all risk, but you must assess whether a limited risk justifies the payment of major sums.

Of course, it is impossible to exclude all risk, but you must assess whether a limited risk justifies the payment of major sums.

It is important to take the time to read your contract properly and make your own calculations, to ensure that you don’t fall for the easy option and pay over the odds for your peace of mind. Rather than paying for expensive maintenance contracts on equipment that will never belong to you, it may be better to speak to your banker to negotiate the terms of a consumer credit that will enable you to purchase better quality equipment that will last longer without any major worries.