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: extended warranties and mechanical breakdown insurance. However, some experts aren't sold on the need for either product.
Here's a quick look at the differences between extended warranties and mechanical breakdown insurance:
• Generally are sold – and backed – by car dealerships; some states forbid sale of extended warranties by other parties. Repairs often must be done by a dealership or its approved repair shop.
• Usually must be paid for all upfront, in a lump sum.
• Are not insurance, so are not subject to state insurance laws.
• May be purchased for older used cars.
• Can't be canceled for a refund.
• Are not transferable to another owner.
Mechanical breakdown insurance:
• Can be purchased from car dealerships, through third parties such as credit unions or independent insurance brokers, or directly from auto insurance companies. Repairs can be done by any licensed repair shop.
• May be paid in installments.
• Is an insurance product regulated by state insurance laws; the product is backed by the insurer.
• Is primarily issued for new or nearly new cars.
• Can be canceled. The premiums can be refunded if they were paid in advance.
• Can be transferred to a new owner.
Various factors determine your rates
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; and the level of coverage you pick.
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.
You might pay $1,000 or less for a short-term, basic policy on a less-expensive car, Scott says, while getting a top-of-the-line, four-year plan for a new Mercedes could cost $10,000 or more. He notes that the average Mercedes claim exceeds $1,200.
Do you really need either of these?
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. At advocacy group Consumers for Auto Reliability and Safety, President Rosemary Shahan says it's thriftier to simply buy a car with an excellent reliability record. She says manufacturers' warranties usually are adequate to cover new cars.
For a used car purchase, have the vehicle thoroughly checked by a reliable mechanic. Shahan recently did this herself when buying a used Subaru, and it cost just $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 issues an extended warranty, it is supposed to be backed by an insurance product that the dealer buys. But unscrupulous dealers may simply pocket your money, Shahan says.
In one California case from 2008, a Dodge dealer was jailed after embezzling $1.3 million from customers, some of it in extended warranty payments he collected without obtaining the actual warranty coverage.
"They sell the warranties, take your money, and then never activate the policy," she says. "Then you've paid in advance to have these repairs covered and you find out you have no policy when you need it."
Of the two products, Shahan notes that mechanical breakdown insurance is the more reliable one, as it is backed by a major insurer rather than an individual auto dealership.
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 MBI for my car?
If you're interested in mechanical breakdown insurance, the first step is to discover 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 eight years old and with up to 75,000 miles on the odometer. By contrast, Mercury's plans go up to six years or 100,000 miles.
GEICO's plan is only for GEICO auto insurance customers, and only for cars with less than15,000 miles that are less than 15 months old. You must be the first title holder of the vehicle. GEICO allows customers to renew mechanical breakdown policies until a car is 7 years old or has 100,000 miles on it, whichever comes first.
One thing all mechanical breakdown policies have in common: You must sign up for the policy before your manufacturer's warranty expires.