Who wants to hear all about why that extended warranty industry exists? Because I know.

---

Okay, a couple of votes, here goes.

First, let’s talk about what an extended warranty is. It is an insurance policy. There is a deductible. The amount you pay for this policy is the premium, just like any other insurance policy. When something breaks on your car, you make an insurance claim. This may be “you pay for the repair, parts and labor, and then make the claim yourself”; it can also be "the shop gets authorization from the warranty insurance company, and proceeds with the repair, then the check for the claim goes directly to the shop (with you paying the shop directly for the deductible and whatever the insurance company didn’t pay for).

Sounds like a kind of good deal, right? Insurance to pay for car repairs, just like you have insurance to pay for healthcare. Hold your horses.

There are two kinds of automobile extended warranties: inclusive and exclusive. An inclusive warranty only covers items included on a list of covered items. These are generally bad, because the list of items covered is generally things that aren’t going to fail anyway, or if they do, will not cover necessary associated parts or labor, which makes it less likely that an owner would complete the repair work. Generally, things like “hoses” are not on the list, which gives the insurance company the power to deny coverage of an air intake “hose” or a power steering “hose” or an AC refrigerant “hose” – even though those things (and frankly regular old coolant hoses anymore) have very long lifespans.

An exclusive warranty covers everything not on a list of items. These kinds of coverages can be all right, as the list of non-covered items generally specifies wear and maintenance items. If you are buying a car from a dealership, new or lightly used, you may be offered such a policy, and it may be suitable for you - but read all the details in the contract.

The shady spam call extended warranties will always be inclusive policies, and they are never worth buying.

That’s it, right? Scammers sell shitty policies and avoid paying claims? Nope, we’re not done yet.

Remember how these are insurance policies? Just like homeowners insurance, comp/collision/liability insurance, if you cancel the policy before the term is up, you get a prorated amount of money back from the insurer. If your policy costs $1000, and the policy is for five years, and you cancel after 2.5 years, you get $500 back. Since these are insurance policies, you can do that with these extended warranties as well, but that is never advertised. Keep that bit of information about cancelling in the back of your head for now.

So a scam caller gets a mark on the phone, gets them half interested in this “extended warranty” (by failing to identify it as an insurance policy and by overstating what it actually covers). But the mark doesn’t have $2500 (they’re always way too expensive). Not a problem, you can make monthly payments! All you have to do is pay 10% now, then small monthly payments for … kind of forever! This is called financing.

One, when you finance an extended warranty, you’re paying interest on top of the premium, because you are essentially taking out a loan to pay the full premium cost, and then paying off that loan. The scammer transfers you to their “finance department” to finalize everything. This is probably an entire different company which only finances extended warranties. (I worked for one, briefly.) At no point do you ever find out that you are taking out a loan. They don’t pull credit, you don’t have to “qualify” beyond paying the 10% right now. Why is that?

Remember about cancelling and getting refunded? The loan is collateralized with the insurance policy. You pay the 10% right now, and if you never make another payment, the lender simply cancels the policy, and the lender receives the refund for the unused portion of the policy term. And they’ve made at least some profit, because that 10% “down” covers more than the first several months of policy payments. Every additional loan payment is 100% gravy for the lender, so they will run their own in-house collections department (probably one or two people) who will call and angrily harass the mark incessantly.

Scam caller gets their “commission” for selling the policy, insurance company gets paid for some amount of policy term (which probably hasn’t had any claims made against it), loan company gets some profit from their “efforts,” and the mark is out at least $250 and gets collections calls for the rest of their life.