Mechanical breakdown insurance

Don't buy what you don't need

If you buy a car from a car dealer, they might offer you mechanical breakdown insurance. Here we explain what this insurance is, and how it can be an unnecessary purchase when you are covered by other statutory and new car warranties.

What is mechanical breakdown insurance?

Mechanical breakdown insurance, or motor breakdown insurance (MBI), is a type of add-on insurance policy that a car dealer might offer you when you buy a car from a car dealer. It provides some cover for the repair or replacement of specific parts of your car if you suffer an unexpected mechanical failure.

However, there are lots of exclusions which means many mechanical problems are not covered and, if you already have a new car warranty, the MBI only kicks in after the new car warranty expires.

Sometimes MBI is called extended warranty insurance, because it commences after your new car warranty ends. However, this is different from a manufacturer's extended warranty as it is provided by an insurance company. If you're not sure what your buying, or who is providing the cover, make sure you ask. 

ASIC's Peter Kell talks about mechanical breakdown insurance

Listen to ASIC Deputy Chairman, Peter Kell talk about the sale of add-on insurance policies like mechanical breakdown insurance through car dealers and how the market is failing consumers. 

Subscribe to ASIC View podcast on PodBean.

Do I need mechanical breakdown insurance?

Depending on what the problem with the car is, your rights under Australian Consumer Law protect you after the new car warranty expires. This means you can ask the car dealer or manufacturer to fix a major fault with the car. So MBI doesn't necessarily give you any more protection than you already have if you buy a new car.

Visit the ACCC's website for details on consumer guarantees under Australian Consumer Law.

Although car dealers sell you MBI when you buy a new car, the coverage doesn't start until the new car warranty expires. So, if you get an MBI policy when you buy a car that comes with a 3-year new car warranty, you will be paying upfront for a policy you won't be able to claim on for at least 3 years.

What not to buy

Mechanical Breakdown Insurance-infographic thumbnailOur mechanical breakdown insurance infographic shows why you shouldn't buy this type of add-on insurance product when you purchase a car from a dealer.

Things you should know about mechanical breakdown insurance

Car dealers get commissions for selling insurance

Car dealers who sell these policies receive a commission on the sale. This incentive to make the sale might be in their best interests but might not be in yours.

You are already covered for major faults

New car warranties and the Australian Consumer Law cover you for most mechanical failures for a few years so it can be unnecessary to buy mechanical breakdown insurance.

Insurance will add to the cost of your car

MBI policies often charge premiums that are packaged into your car loan. Because you pay interest on the premiums, the insurance is even more expensive and the amount you have to borrow is higher.

Our MoneySmart Cars app can help you work out the real cost of buying a car and allow you to crunch the figures on add-on insurance.

Work out the real cost of buying and running a car.

MoneySmart Cars app

Cancellations and refunds

If you've paid for the policy by packaging it into your loan, and you cancel the policy because you no longer want it, you will usually only receive a partial refund, much less than the unused portion of your policy.

What to ask before taking out motor breakdown insurance

Buying a car can be a long process. You can spend hours negotiating with sales people, making endless decisions, and filling in paperwork, but it's important to remain calm and ask questions if you're unsure about anything.

Here are some things to consider if you are offered an MBI policy by a car dealer:

  • Cost  - Ask for the full cost of the premium, including the cost of any interest payable if it is added to your loan.
  • Restrictions and exclusions - Find out what is - and is not - covered. Make sure the coverage is worth the cost.
  • Vehicle servicing obligations - Ask about how often and where you have to get your car serviced in order for the insurance to remain valid. Mechanical breakdown insurance policies sometimes restrict where you can go to get your car serviced, if you go somewhere else they might reject any future claims.
  • Coverage period - Find out how long you will be covered for.
  • Commission - Ask the car dealer how much commission they will get if you buy the insurance policy.
  • Cooling off period - Is there a cooling off period where you can cancel the policy at no cost if you decide you don't need it?

How to make a claim, cancel or complain about motor breakdown insurance

See our add on insurance webpage for details on how to make a claim on your policy, cancel it or make a complaint.

Before you buy mechanical breakdown insurance, make sure you understand how much it will cost you and what it really covers. Salespeople can be very persuasive but when you are covered by Australian Consumer Law, this type of policy can be an unnecessary purchase.

Related links

Last updated: 04 Oct 2018