Vehicles are an essential part of our daily lives, but unexpected repairs can pose a financial challenge. Auto repair costs are also on the rise, making even minor malfunctions cost a painful chunk of money.
Let’s review the benefits and drawbacks of taking out a personal loan for auto repairs, as well as alternative financing options to consider.
The financial reality of auto repairs
The average cost of an auto repair is around $500. However, a major car repair can cost significantly more, requiring vehicle owners to dip into their savings.
Car repairs don’t just offer performance improvements, but also ensure safety. Timely repairs can prevent car accidents and further malfunctions. A regularly maintained vehicle can last more miles and retain a higher resale value.
The unpredictability of vehicle malfunctions can damage your financial stability and deplete your emergency fund. It’s important to be aware of the common auto repair costs and types so you have an idea of what expenses to expect.
Here is a breakdown of the typical expenses associated with automobile repairs.
- Spark plugs: $250
- Catalytic converter: $1,300
- Cracked windshields: $300
- Tire repairs: $30
- Car door dent: $50
- Car door replacement: $1,000
- Engine replacement: $4,000
If you don’t make the necessary auto repairs in time, you might need to pay more in the long run, especially if the vehicle ends up malfunctioning.
Traditional means of funding auto repairs
Other than using personal loans to cover auto repairs, here are other popular alternatives.
Many car owners choose to fund their auto repairs using their own savings. Emergency funds can help you meet the necessary out-of-pocket payments. The main advantage of using your personal savings is that you won’t directly put yourself into debt. By paying the upfront repair bills, you won’t need to worry about any monthly installments.
The downside to using your individual savings is that you might be sacrificing your financial stability. You would need to replenish your savings account. If unforeseen challenges occur, you might no longer have enough money to properly face them.
Credit cards are a convenient alternative to personal loans. You can even choose to turn a particular credit account into a dedicated auto repair account. This can help you track the total costs of your auto repairs more easily.
However, it is prudent to consider the pitfalls associated with credit cards. The interest rates are often higher than those of personal loans. If you fail to make the minimum payment in a month, you can quickly accumulate significant interest and credit score damage. Credit card debt can be frustrating to manage.
You’ve probably already heard of and dismissed the idea of extended car warranties. Still, warranties can be useful.
Car warranties may provide coverage for vehicle components that break down, so long as the damage occurs within the designated timeframe.
Borrowing from friends or family
You might be able to receive financial support from friends and family. It’s a good idea to set clear repayment terms to make sure you are all on the same page. Otherwise, there might be strain on the relationship.
Car insurance typically only covers repairs if they arise from covered incidents (AKA perils). Here are the commonly covered perils:
- Car accident
Most auto insurance policies will not cover mechanical breakdowns or natural wear and tear of your vehicle. Even comprehensive auto insurance may not cover your necessary auto repairs. If you are not sure about whether a claim will be covered, you can clarify with your insurer.
Understanding personal loans for auto repairs
A personal loan provides you with a lump sum of money after the lender approves your loan application. Over the life of the loan, you will be required to repay the loan plus interest. Using a personal loan to cover the upfront expenses of auto repairs can provide car owners with various benefits.
Here are the main reasons you should consider a personal loan for auto repairs.
No need for collateral
Unsecured personal loans do not require you to offer any valuable assets as collateral. This lack of collateral requirement makes personal loans lower risk when compared to auto title and equity loans. If you cannot meet the requirement terms and end up defaulting on the unsecured personal loan, you won’t lose your vehicle.
Faster approval and funding
Unlike traditional loans, personal loans usually have a faster approval and funding process. With some lenders, you could even receive same-day approval and expedited funding, allowing you to take care of the most urgent vehicle repairs.
Flexible fund usage
One of the top advantages of taking out a personal loan is the flexibility in how you can use the funds. For auto repairs, the funds can be used for a wide range of repair needs. From broken engine and cracked windshields all the way to car dents, you can use the loan funds to cover any car repairs.
If you end up with any extra loan funds, you can still keep that money in your savings account for personal usage or any future auto repairs.
Predictable repayment schedule
Personal loans come with clear repayment terms and highly predictable monthly payments. The simplified repayment facilitates your budgeting and financial planning. If you find yourself often bogged down by multiple financial obligations, the clear repayment schedule of personal loans can be beneficial.
What are the key factors lenders assess for loan approval?
When looking at your loan applications, lenders will consider various factors that influence your ability to repay the loan. The higher risk you are, the less likely you will receive favorable loan terms. Each lender has their own eligibility criteria, but here are the factors you can expect lenders to take into account:
- Credit score
- Credit history
- If you have a co-signer or guarantor
- Desired loan amount
- Whether you have defaulted on a loan before
- Loan purpose
- Debt-to-income (DTI) ratio
- Credit utilization ratio
If you’re having trouble obtaining a favorable loan, you might want to try boosting your credit score. Creditworthiness can be enhanced through regular, on-time bill payments, low credit utilization, and a diverse credit mix.
Pros of using personal loans for vehicle repair costs
Immediate access to funds
Some car repairs need to be completed promptly, otherwise the damage could worsen or the vehicle cannot be used. The quick access to loan funds ensures timely auto repair. If you need to use your car urgently, taking out a personal loan can help you get the repairs done in a timely manner.
No high interest debt
Compared to alternative financing methods like credit cards, personal loans often have lower interest rates. This means that you won’t be locked into debt with high interest.
In addition, if you have a good credit score and financial standing, it becomes easy to obtain a personal loan with competitive interest rates.
Preservation of liquidity
By using a personal loan for your vehicle repairs, you can maintain your liquidity in case you really need it. You won’t have to deplete your personal savings. If you want to balance your personal savings and debt, you can opt for a loan amount that partially satisfies your car repair costs.
Key considerations before opting for a personal loan for auto repairs
Assess the total loan cost
The loan agreement should tell you the total cost of borrowing in a year, also known as the annual percentage rate (APR). The APR includes fees, discount points, and the interest rate. Before you sign the agreement, it is critical that you are aware of any associated fees you could be charged. The loan may be more expensive than you expect.
Understand the loan terms and conditions
Different lenders set different terms and conditions for borrowers to follow. If you’re uncertain about any element of the loan offer, make sure that you clarify with your loan officer.
Breaching the loan terms and conditions can result in penalties or even a loan default, which can have a significant negative credit impact.
Evaluate your repayment capability
Just like how lenders assess your creditworthiness and financial stability to estimate your repayment capability, you should evaluate your situation as well. Here are the key points to keep in mind when looking at your repayment ability.
- Monthly income
- Employment stability
- Existing debt obligations
- Interest rate of the loan
Compare multiple loan offers to secure the best deal
Before you pick a loan, review other offers to see which option aligns best with your goals and needs. Sometimes, the loan offer that seems the best at first glance may not be advantageous in the long run due to potential fees and penalties.
Compare various components of the loan offers, such as:
- The interest rates
- Loan tenures
- Prepayment penalties
- Origination fees
Alternative solutions to manage auto repair expenses
Auto title loans
An auto title loan is a short-term, secured loan that is backed by your vehicle as collateral. You will receive the approved loan funds for your repair needs, but the lender will be able to place a lien on your car title. This can prevent you from driving, which is counterproductive since you need to funds to fix your vehicle. If you want to cover auto repair costs, it is typically not a good idea to seek out car title loans.
Auto equity loans
An auto equity loan allows you to borrow money against the value of your car. The approved loan amount will depend on how much equity you have built.
The main drawback to taking out an auto equity loan is that these loans use your vehicle as collateral. If you fail to repay the loan according to the terms and conditions, the lender can seize your vehicle to recoup their losses.
Make sure that you are aware of the risks associated with auto equity loans before you obtain one.
Auto repair financing from mechanics
Many repair shops and mechanics offer financing options to make their services more affordable. If you have a good relationship with your mechanic, it might be beneficial to ask whether they offer advantageous financing or discount options.
DIY repair for minor issues
While DIY repairs can be a cost-effective strategy to fix minor issues, they do carry the risk of potentially exacerbating the vehicle’s problems.
If you are thinking about performing DIY auto repairs, ensure that you take into account the following:
- The type of issue
- What repairs are needed
- Safe workplace and tools
- Clear instructions and tutorials
- Professional advice
- Know your limits
- Local vehicle mods and repair regulations
Remember that if you are uncertain or uncomfortable about any element of an auto repair, it’s advisable to consult a licensed professional so that you can ensure safety.
Discounted repair services
Depending on where you live, you might want to seek repair assistance from nearby vocational schools. Some schools offer discounted auto repair services because of their active student training programs.
Auto repairs can cost anything from less than a hundred dollars to several thousand. It is important to make the necessary repairs promptly so that you don’t endanger anyone who uses the vehicle. Timely repairs can also prevent further damage, save you money in the long run, and help your car retain its resale value.
If you’re facing financial difficulties but need to repair your vehicle, consider taking out a personal loan. This alleviates the upfront burden of costly auto repairs, allowing you to maintain a healthy personal savings fund.
Make sure you weigh the various financing options and choose the one that best aligns with your current standing, vehicle needs, and repayment capacity. Other than personal loans, you can also consider leveraging credit cards, auto equity loans, or car warranties for your car repairs.
Resources and further reading
Before taking out a personal loan, it’s always good to research your lender options for trustworthiness. Here are a few popular, reputable lenders offering personal loans for auto repairs.
Personal Loans Company Reviews
Recently Updated Articles