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Mechanical breakdown insurance vs. extended warranty: Which is better?

auto insurance mechanical breakdown

It's a budget buster for many drivers: Your car has broken down suddenly and needs expensive repairs. Worse, the manufacturer's warranty for the car has expired, and you're on the hook for the cost.

If you fear having to shell out money for unexpected car repairs, there are two products you can buy that can shield you from pricey auto repair bills: vehicle service contracts (sometimes referred to as extended warranties) and mechanical breakdown insurance (MBI). However, some experts aren't sold on the need for either product.

Here's a quick look at the differences between these products.

Vehicle service contracts (VSCs):

• Generally are sold through auto dealerships at the time of purchase. Repairs often must be done at a dealership or an approved repair shop. Typically, these contracts are backed up by insurance companies, not car dealerships.

• VSCs typically are bought when a car is purchased. They often are financed through the same loan the buyer uses to purchase the car, says Rob Glander, CEO and president of GWC Warranty, a provider of VSCs and related insurance and finance products.

• May not be subject to state insurance laws. VSCs are regulated differently around the country, Glander says. "It is a patchwork quilt," he says. "There are 50 states with different levels of regulation." Ask a dealerships that sells VSCs about how these products are regulated in your state.

• May be purchased for older used cars but aren’t exclusively for these types of cars.

• May be canceled for a refund.

• May be transferable to another owner.

Mechanical breakdown insurance:

• Can be purchased through car dealerships, through third parties such as credit unions, independent insurance brokers, or directly from auto insurance companies. Repairs typically can be done by any licensed repair shop, but you should read your contract carefully to be sure, says Janet Ruiz, a spokeswoman for the nonprofit Insurance Information Institute.

• May be paid in installments.

• Is an insurance product regulated by state insurance laws; the product is backed by the insurer.

• Is typically issued for new or nearly new cars. The older the car, typically the more MBI coverage will cost, says Jonathan Stein, a consumer law attorney based in Elk Grove, Calif.

• Can be canceled. The premiums can be refunded if they were paid in advance.

• Can be transferred to a new owner.

How much does a mechanical breakdown policy cost?

What will a mechanical breakdown policy cost you? Rates vary widely, says David Scott, vice president of Mercury Select Management Co.

Four key factors determine your rate:

  • The size of your deductible.
  • The make, model and age of your vehicle.
  • How many years of coverage you want.
  • The level of coverage you choose.

Mechanical breakdown insurance offerings include basic drive-train-only policies to top-level coverage where the few excluded items are listed in the plan. Scott says deluxe policies even may provide a rental car and pay your hotel bill if your car breaks down when you're out of town.

Stein says if you're paying more than $500 to $1,000 per year for an MBI policy, it probably isn't cost-effective. You would be better off taking the money and setting it aside for future repairs.

Do you really need extended warranties or mechanical breakdown insurance?

Before you delve too deep into either of these products, know that consumer advocates discourage drivers from buying either extended warranties or mechanical breakdown insurance. Rosemary Shahan, president at advocacy group Consumers for Auto Reliability and Safety, says it's thriftier to simply buy a car with an excellent reliability record. She says manufacturer's warranties usually are adequate to cover new cars.

For a used-car purchase, have the vehicle thoroughly checked by a reliable mechanic. Shahan did this herself about four years ago when buying a used Subaru. The inspection cost $96.

She recommends checking the Mechanics Files maintained by the "Car Talk" radio show for a referral to a trustworthy shop near you. If you're buying a used car from a dealership, Shahan says, you still should have an independent mechanic inspect the car.

"This is the most important $100 you'll spend on the entire transaction," she says.

Shahan warns of numerous instances when dealer-issued extended warranties turned out to be worthless. When the dealer sells a VSC, it is supposed to be backed by an insurance company. But unscrupulous dealers may simply pocket your money, Shahan holds.

Reth strongly disagrees. The products sold at car dealerships are backed up by reputable companies that hold dealers accountable, he stresses. "They don't pocket the money."

Of the two products -- VSCs and MBI -- Shahan says she doesn't favor one over the other. Rather than relying on them, "you are better off just getting a good car," she says.

Mercury's Scott recommends checking to make sure your insurer is in solid financial shape. The insurer should have no less than an A- rating from credit-rating agency A.M. Best, he says.

Can I get mechanical breakdown insurance for my car?

If you're interested in mechanical breakdown insurance, the first step is to determine whether an insurer would be willing to sell it for your vehicle. Many major auto insurance companies offer mechanical breakdown policies, including Mercury, GEICO, USAA and 21st Century, and each company has its own set of rules.

For instance, USAA offers one plan that accepts vehicles up to up to 10 years old with less than 115,000 miles on the odometer. By contrast, Mercury's plans go up to 7 years old or 100,000 miles.

GEICO’s plan is only for GEICO auto insurance customers, and only for cars with fewer than 15,000 miles that are less than 15 months old.


  • Dan said Reply

    most of this information is false. most if not all extended coverages are
    transferable and pro rated refundable. and they are also not always have to
    be paid in a lump sum. and if you set up coverage at a dealership or credit union it is still through a 3rd party administrator that is backed.
    So a more accurate review:
    does not have to be paid in full
    can be transfered to new owner
    can be pro rated refundable if they choose to cancel at anytime
    repairs can be done at any liscense repair shop nation wide
    and all extended warranties are adminstrated by the VPA and AM Best.
    I suggest more extensive research and maybe re-typing the article

    maybe use more than one source to get an un biased opinion

  • Curtis Phillips said Reply

    Did the author of the article even review any of the programs mentioned in the article? FACT: I recently purchased a mechanical breakdown policy on a seven year old car that the manufacturer's warranty had expired 4 years ago!

  • LarryWa said Reply

    The mechanical breakdown insurance that we purchased from Geico when we bought our new car cost a fraction of the price of the extended warranty. Originally, the policies were up to 100,000 miles with unlimited years, they recently limited it to 100,000 miles and 7 years.

    Not long ago we had a rush hour breakdown of my wife's 2010 Ford Escape. we called Geico. They towed the car to the dealership, paid for the rental car which was on site and gave us the choice of taking it anywhere (We chose the dealer). When combined with the comprehensive insurance, your car is covered from virtually any system failure, even if it includes your 4 year old dumping her drink into your ridiculously expensive electronic packages that are on all of the new cars. For us, we paid a $250 deductible and the insurance company takes care of everything for us, including dealing with the repair representative at the dealership.
    That coverage costs us around $6 a month and fixes everything that the most expensive extended 100,000 mile, 7 year warranty will cover and more.

    So, draw your own conclusions. Personally, I recommend dependable cars that don't need extended warranties. My 2010 Ford Escape with 63,000 miles has been towed to the dealership 4 times due to engineering related failures, my favorite being when a relatively new battery simply exploded while starting the car shortly after the dealership fixed one of the serious recalls for that model. I have owned 3 Toyotas and not one was ever towed to a dealership.

    I want to support American jobs and try to buy American but our experiences with Chevrolet was bad, Ford horrible, and Toyota, which I don't want to buy, have all had perfect track records. Volkswagen, Volvo, and Toyota can not be beat unless you enjoy spending time sitting in the waiting room at your local dealership and spending time and money that is totally avoidable.

    Just one man's very sad but true opinion.



  • ted said Reply

    Extended warranties:

    • Generally are sold -- and backed -- by car dealerships. Repairs often must be done by a dealership or its approved repair shop.

    FALSE. These aren't backed by car dealerships. They are backed by insurance companies or a risk retention group. This article is stupid.

    • Korrena said Reply

      Hi Ted,

      You're right in that extended warranties aren't generally backed by dealerships so I changed the wording to reflect this. However, there are warranties sold out there that are backed by car dealerships (as mentioned in this article -

      Thanks for commenting!
      Korrena -

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