Money-Back Extended Car Warranties and Aftermarket Warranties

The consumer advocate Clark Howard discussed money-back car warranties last week (see his show notes). These extended automobile warranties allow you to get the money back if you never make a claim. In the last 3 years since I started this blog, I can't remember seeing any companies that offer these cash-back warranties.

In Clark's opinion, you should avoid warranty companies that offer these cash-back policies. In fact, Clark warns against buying warranties from any company except the manufacturer. Here's the problem as Clark describes it:

But the warranty company itself doesn't even have enough underwriting to pay for repairs. They just collect money with no intention of paying it back out. Then they do what's called a "bust-out," which is essentially like filing for bankruptcy, and disappear with their share.

As I mentioned in this previous post, don't assume that your dealership is selling a manufacturer's extended warranty. It could be an aftermarket warranty. As Clark mentions, dealers often sell aftermarket extended warranties due to the high profit margins.

One important point that Clark doesn't mention is that you don't have to buy the manufacturer's extended warranty at the dealership where you bought the car. As I described in this previous post you can often get a better deal if you shop around. The service that I described in that post is designed to help you with this search.

Clark mentions that:

If you do buy a car warranty, you want to be sure it is the manufacturer's own. Otherwise, it only has a marketing company backing it up, and it isn't worth the cost of the paper it's written on.

There are other alternatives besides the manufacturer and marketing companies. Many insurance companies sell mechanical breakdown insurance. I describe these in this previous post. Geico is one insurance company that offers these. Two commenters in Clark's show notes reported being happy with their Geico mechanical breakdown coverage.