A car repair loan can help cover the cost of fixing a vehicle after an accident or breakdown. Since repairs are expensive, people often do not have enough liquid cash to have their vehicles fixed immediately. Because of this, a car repair loan is important for drivers who cannot afford to be without a car and do not have the money to pay for repairs in the short term. A repair loan is also useful in emergency repair situations or when asking family or friends for a loan is not an option.
What is a car repair loan?
Car repair loans are similar to any other loan, except the money goes toward auto repairs or the driver’s insurance deductible for accident repairs. Many people think that they will never need a car repair loan, but according to Lending Tree, newer cars with added features often cost more to repair. If a car has numerous airbags, advanced technology, imported parts or aftermarket add-ons, the repair costs can run in the thousands of dollars. Also, depending on the make of the car, what may seem like a simple repair can actually end up being quite complicated.
Car repair loans are best for extremely expensive repairs. A loan company will pay for the repairs and then bill the driver in affordable monthly installments. If using the money for an insurance deductible, the loan company will give the driver the money to use toward both the deductible and any needed repairs. If borrowers have money left over from the loan, they can use it to repay the loan or to pay for other (not necessarily related) expenses.
Types of Car Repair Loans
The two main types of car repair loans are loans issued through a bank or lending company and title loans, which are often issued through a pawnshop or “quickie” loan company. Standard loans through traditional financial institutions involve an application process and a credit check. Loan approval usually requires the borrower to have good credit. Some repair shops also work with financial institutions to supply repair loans to customers.
A title loan is borrowed against the title of the vehicle. Many lenders will offer a “no credit” or “bad credit” option for loans based on the value of the vehicle. Services like EZ Repair Loan allow car owners to call from the dealership to request loan approval. After receiving the proper paperwork and invoice for the repairs, the company either approves or denies the loan. Loan amount and payments are calculated according to the value of the vehicle, and there is no need for credit cards.
While title loans are preferable for people with little credit or bad credit, borrowers run the risk of losing the vehicle on unpaid loans. Should the borrower default on payments, the lender will take possession of the vehicle as repayment of the debt. Also, since there is greater risk involved with a title loan, interest rates are usually higher than rates offered by banking institutions, sometimes climbing into triple digits. When researching lenders, it is important for borrowers to understand the loan’s conditions, interest rate and repayment terms before agreeing to take the money.
Benefits of a Car Repair Loan
The main benefit of a car repair loan is being able to pay for highly priced repairs without needing to come up with a single lump-sum payment. The same is also true for high insurance deductibles that must be paid before insurance coverage takes effect.
Other benefits include:
- Being able to improve the car with optional procedures, such as a new paint job or a detailed cleaning
- Not having to charge the repairs to a high-interest credit card
- Being able to pay for repairs without asking friends or family for money
- Getting the vehicle back in a timely manner, instead of having to save money slowly for repairs
Car Repair Loan Disadvantages
There are also some disadvantages to a car repair loan. The biggest disadvantage occurs when borrowers take out a title loan, because control of the vehicle is taken away from the driver and is given to the lender. While borrowers may feel that the situation is not dangerous, missing only a few payments could cause the lender to send a repossession company to collect the vehicle. For people who borrow through a bank, missing payments can damage their credit ratings and have a serious effect on their ability to acquire loans in the future.
Something else to consider before taking out a car repair loan is the actual value of the vehicle. If the repairs cost just as much or only slightly more than buying a new or used vehicle, then taking out a repair loan may not be a smart financial decision. For example, if the cost of repairs is $6,000, but the value of the vehicle is only $4,500, taking out a repair loan for $6,000 is detrimental, and the driver is better off trading in or selling the old vehicle for a new one. However, for repairs that do not exceed the vehicle’s value, a car repair loan can be a good way to get car repairs done quickly and get back on the road.