Car trouble is always a hassle, but it becomes even more nerve-wracking when you donâ€™t have the cash to pay for repairs. If the vehicle you rely on to get to work has just broken down or been involved in an accident, you might need a car repair loan.
Hereâ€™s what to consider if your car needs some work:
You wonâ€™t know if you need a loan for car repair until you find out if youâ€™re on the hook for repairs. If your vehicle is under warranty, the repairs could be covered, and if you were involved in an accident, the other party might be at fault.
If youâ€™re not sure if your car is under warranty, CarsDirect recommends finding the vehicle identification number, or VIN, and contacting your local dealership. If they are unable to assist, the site recommends searching for your vehicle history report on Carfax.
In the case of a car accident, Esurance notes that auto insurance is fault-based in most states. Therefore, if you werenâ€™t at fault, the other driverâ€™s insurance company will likely help pay for your car repairs, medical expenses and other costs. If you live in a no-fault state, you might still qualify for assistance with car repairs, so check with your insurer.
You might not even need a car repair loan â€” or you can at least reduce the size â€” if youâ€™re able to score the best possible deal on repairs. If you were in an accident, your insurance company will likely recommend an auto body shop. But you ultimately have the final say on where the repairs are made, according to the National Association of Insurance Commissioners.
Itâ€™s also wise to shop around and gather quotes from several auto professionals, to be sure youâ€™re getting the best price. When looking for a repair shop, the Federal Trade Commission advises:
If youâ€™re really trying to avoid car repair loans, you might consider taking your vehicle to an auto mechanic school. Of course, this can be a risky move, as technicians are still students. Before turning your car over to the school, check into liability issues, in case the problems arenâ€™t fixed or new ones are created.
If you need a car repair loan to get back on the road, a personal loan might be the answer. This type of loan requires no collateral, so you wonâ€™t have to pledge assets like your home or car to secure financing. Most personal loans have a fixed-interest rate and a term ranging from one to five years, allowing you to choose an option that fits your budget.
LendingTree offers a personal loan tool that may help you find and compare personal loans from lenders. Youâ€™ll fill in basic information about yourself and what youâ€™re seeking in a loan. Then, you may be provided with loans to consider from up to five different lenders.
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To kickstart your search for car repair loans, consider these personal loans offered by lenders in the MagnifyMoney personal loan marketplace.
â€śA personal loan has a fairly reasonable interest rate when you compare them to other non-asset based borrowing like credit cards, so they are actually not a bad deal, as long as you have decent credit and shop around for the best interest rates,â€ť said Lucas Casarez, CFP and founder of Level up Financial Planning, LLC, a virtual fee-only financial planning firm based in Fort Collins, Colo.
Casarez also warned against seeking nontraditional financing, such as working with a pawn shop or a payday lender.
â€śThe interest rates associated with those types of lenders is eye-popping and to be avoided at all cost(s),â€ť Casarez said.
If you decide to take this route, Jason Owens, CFP and financial advisor at Bright Road Wealth Management, a fee-only independent investment advisor with offices in Anchorage, Ala. and Tacoma, Wash., emphasized the importance of making sure you can afford the payment.
â€śAnother common problem is when people donâ€™t compare the alternatives, assuming their primary bank will give them the best rate,â€ť Owens said. â€śThis is almost never the case.â€ť
If you have equity in your vehicle or home, Casarez suggested a cash-out vehicle refinance or a home equity line of creditâ€” HELOC â€” as two possible alternatives.
In a cash-out refinance, the total value of your new loan exceeds the amount needed to pay off the asset â€” in this case, your vehicle. This only makes sense if you can lower the interest rate and monthly payment, in addition to getting the cash back you need.
A HELOC grants you access to a line of credit you can borrow from as needed. Your lender determines the maximum amount of funds available, then youâ€™re able to choose the amount you actually use.
â€śBoth of these options have a significantly lower interest rate than a personal loan because they are tied to assets,â€ť Casarez said.
In some cases, paying for the car repairs with a credit card might be the wisest move.
â€śFor someone with good credit, credit card rates will likely be better than personal loan rates, particularly an introductory rate,â€ť said Owens. â€śIf a person can commit to paying the card off during the introductory period, thatâ€™s frequently the best way to go.â€ť
Putting car repairs on a credit card might benefit some people, but itâ€™s not the best choice for everyone.
â€śIf someone has poor credit, a personal loan might have better rates, particularly if they can pledge collateral â€” a CD at the same bank, for instance, â€ť Owens said. â€śThe payments are usually fixed to pay off the loan over a certain term, so you donâ€™t have the flexibility of just paying the minimum and extending the term.â€ť
Ultimately, Owens said the choice between putting repairs on a credit card or taking out a personal loan depends on the personâ€™s behavioral history in previous similar situations.
â€śThis is difficult, because in many cases, the better choice from a financial perspective is not the better choice when you bring human behavior into the equation,â€ť Owens said.
Casarez and Owens agreed establishing an emergency fund is the best way to avoid running short on cash to pay for car repairs in the future.
â€śIf they havenâ€™t started, they should set an emergency fund goal, with a specific date and dollar value, then begin setting a little (aside) each month, even while they are paying off this debt,â€ť Owens said. â€śThe biggest mistake people make with regards to an emergency fund is attempting to wait until they are out of debt to start one.â€ť
Getting car repairs in a timely manner can be a matter of life or death because itâ€™s unsafe to drive a vehicle that isnâ€™t functioning properly. Taking out a loan for a car repair can allow you to get issues fixed without delay. If you choose this route, always look for ways to save money on repairs.
And if you decide to take out a loan for repairs, be sure to compare lenders to get the best deal possible.
This article contains links to LendingTree, which is our parent company.
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