Be cautious before buying an extended warranty for your car

The Federal Trade Commission recently sent almost 6,000 checks worth more than $4 million combined to victims of illegal robocalls. These car owners were tricked into buying what the FTC called bogus “extended auto warranties.”

The FTC said defendants Fereidoun “Fred” Khalilian and his company, The Dolce Group Worldwide LLC, “doing business under the name My Car Solutions, conned people into paying thousands of dollars by leading them to believe that the company was affiliated with auto dealers and manufacturers, and that it was offering to sell them extended auto warranties.”

The sad reality, according to the FTC, was no one received an actual warranty extension and people who tried to get their money back found it nearly impossible.

The FTC has some good advice if you are considering an extended warranty for your new or used car. The first important consideration is who backs the warranty. According to the FTC, it may be the manufacturer, the dealer or an independent company.

Your best bet is always going to be a warranty backed by the manufacturer. Those warranties are honored throughout the country at the manufacturer’s dealer network. Thanks to computerized records, any dealer can pull up information on your warranty and know instantly what work you are eligible to have done and at what price.

A dealership warranty is only going to be as good as the dealership that provides it. That’s not a blanket condemnation of dealership warranties. It just means you, as the consumer, assume some financial risk if a dealership goes out of business.

From a financial standpoint, the best warranties from independent companies are going to be those offered with an insurance policy that backs them. Insurance companies are regulated in a lot of states, which affords you more protection.

According to the FTC, insurance regulations generally require companies to:

n Maintain an adequate financial reserve to pay claims;

n Base their contract fees on expected claims. Some service contract providers have been known to make huge profits because the cost of their contracts far exceeds the cost of repairs or services they provide; and,

n Seek approval from the state insurance office for premiums or contract fees.

A lot of these independent warranties are handled by companies known as administrators. They don’t make their money by paying claims. It’s in their best interests to keep claims costs low because that means more profits.

The bottom line is, if you have the fiscal discipline, you should take what the dealer wants to charge you for an extended warranty — if it’s not offered by a manufacturer — and put it aside in a bank account for an emergency repair fund. When a mechanical problem arises you can use the funds.

The best part is, if no mechanical issues present themselves, you’ll still have the money. The same isn’t true if you buy a warranty and never use it. Then the money is gone forever.