What should you do when your car dies, and you still owe money on it?
It depends on the outstanding balance relative to the vehicle’s value in its broken-down state.
Your options are limited when the vehicle is underwater; the repair expense and amount owed exceed the value. Finding a way to fix the car avoids nasty consequences to your credit.
You have more choices when the vehicle is above water; the value exceeds the repair cost and balance owed. You can fix the car or get out of the loan without nuking your borrowing qualifications.
Car Repairs Too Expensive
What should you do if your financed car is no longer working, but the repairs are too expensive relative to your budget? Consider every possible resource to fix a blown engine or failed transmission before ruining your credit.
Repair Assistance
Finding a volunteer willing to fix your dead car is an affordable way to avoid repairs that are too expensive, given that you are still making monthly payments.
Free car repair for low-income families might help needy drivers overcome a blown engine on a financed jalopy. However, access is limited, qualifications are strict, and timely help for emergency needs is rare.
Repair Loans
Many people take out a side loan to fund expensive repairs when their car breaks down while they still owe money on the original financing.
However, the amount owed relative to restored value dictates your options.
Unsecured Loans
Taking out an unsecured loan may be the best alternative if your engine blows and you still owe more money on the loan than the vehicle is worth. You have no equity to pledge as collateral.
Unsecured car repair loans might provide the funding needed to fix your seized motor and get your vehicle back in operating condition. When completing the request, be prepared to verify income and employment.
Title Loans
When your car breaks down, a secured title loan can help fund expensive repairs for people above water on the original financing. Secured contracts often come with better terms.
You can get a title loan even if you still owe money to the original lender, provided you have enough equity in the vehicle. Lenders measure equity by subtracting the outstanding balance and repair estimate from the blue book value.
Gap Insurance
Gap insurance is a long-shot alternative to avoid an expensive repair if your car dies before you pay it off. However, it does not work if your engine seizes or the transmission fails due to poor maintenance or mechanical failure.
Gap insurance covers the difference between your vehicle’s current worth and the amount owed on your loan after an accident causes severe damage.
Plus, gap insurance only pays claims when the primary coverage totals the vehicle (repair costs exceed the restored value).
Lemon Laws
Lemon laws might help you avoid an expensive repair if your engine is seized or the transmission goes out while you still owe money on an auto loan. If you meet these criteria, you could force the manufacturer to provide you with a replacement vehicle.
- You have a substantial defect (impairs the use, safety, or value) covered by the original warranty and not excluded by mileage or time.
- The dealer or manufacturer cannot rectify the engine defect after a reasonable number of attempts or time confined in the shop.
The Better Business Bureau runs a dispute resolution service to help consumers arbitrate lemon law, warranty, and class action cases. Tap into this resource if you need help asserting your legal rights.
Manufacturer Warranty
Always check your manufacturer’s warranty if your car breaks down and you still owe money on the financing. Why pay for a too-expensive repair if you don’t have to?
Check to see if your manufacturer’s warranty has yet to expire. Typically, these programs have a time (up to 10 years) and mileage (up to 100,000) limit, varying across four categories.
- Bumper-to-bumper
- Powertrain
- Corrosion
- Roadside assistance
Extended Warranty
Check your files for any extended warranties you bought before. This is important if your car is in poor condition but you still have a loan balance. You might have forgotten about a warranty that could save you from costly repairs.
I discovered the extra coverage after forking out $3,000 to replace a transmission, and they paid the claim two years later!
- Check the loan or lease agreement to see if the monthly payments include a charge for an extended warranty. Dealer finance managers push the extra coverage at the point of sale.
- Check the declarations page of your auto insurance policy to see if it includes an extended warranty rider. You might have signed up years ago when first insuring the vehicle.
Getting Out Of The Loan
If your vehicle breaks down and you cannot afford to fix it, you have several options for getting out of a car loan. Of course, the consequences for those underwater on the financing are dire.
Rollover Loan
Rolling the loan over can get you out of an auto financing deal if the car dies while you’re still making payments. You’ll have reliable transportation without the expensive repair job.
Rolling over means combining the old balance plus the cost of a replacement car into one contract – minus the trade-in value of the financed jalopy with a blown engine or failed transmission.
Second-car loan requirements vary based on the amount owed relative to the vehicle value after restoration.
- Above-water loans are more accessible because the positive equity on trade-in reduces the amount financed.
- Below-water loans are more challenging because you must show enough income to support a larger monthly payment.
Selling As Is
Selling your beater as is allows some owners to get out of a car loan after the vehicle dies. Of course, this repair-free option works better for people with above-water contracts because the sale price exceeds the balance.
Underwater owners can sell the non-running vehicle as is but will have to come up with extra cash to pay off the remaining amount owed or hurt their credit score for years.
Requesting a personal loan before selling the car can raise the money needed to pay off the remaining balance. Arrange this financing before putting the beater on the market. Lenders might reject your application or approve an amount that proves too small.
Voluntary Surrender
A voluntary surrender allows you to get out of an auto loan when you still owe money on a car that doesn’t run. However, the consequences are dire.
Voluntary surrender means giving the car back to the finance company and stopping making payments, violating the contract you signed.
A voluntary surrender hurts your credit score for seven years, but not as much as repossession, where the lender takes your vehicle for non-payment.
- Above-water borrowers should always sell or trade in their vehicle instead of voluntarily surrendering because they have positive equity.
- Below-water consumers may find that voluntary surrender is better than the alternatives: repossession or bankruptcy.
Filing Bankruptcy
Filing bankruptcy is the nuclear option when your car breaks down and you still owe money. You get out of the underwater loan, but the consequences are worse than voluntary surrender or repossession and could last three years longer.
Bankruptcy hurts your credit score the most because it spans all types of borrowing accounts instead of just auto financing.
- Credit Cards
- Personal Loans
- Home Mortgage
Bankruptcy often stays on your credit report longer.
- Chapter 13 bankruptcy displays seven years because it requires partial repayment.
- Chapter 7 bankruptcy shows for ten years because you repay none of the debt.
