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Many drivers face a tough choice if their car dies while still owing money to the bank or finance company.

Should you fix the vehicle but go further into debt because you lack a sufficient emergency fund?

Or, should you try to get rid of the old jalopy by trading it in at the dealer, selling it as is privately, or junking the heap for parts?

There is no single correct answer to this dilemma, but three factors play a critical role in determining the best course of action.

  1. The estimated repair price from a reputable mechanic
  2. The projected equity if you complete the work
    1. Bluebook value when in operating condition; minus
    2. The unpaid balance on the financing

Paying for Auto Repairs

Investing in repairs is the preferred option when you are underwater on your car loan: the amount owed exceeds the value when operational (negative equity). The alternative, financing more than 100% of a more reliable auto, is viable only for those with pristine credentials: excellent credit score and high income.

However, when your car dies, and you need it to get to work, you may have to bite the bullet and pay to get it fixed.

Emergency Loans

Requesting an emergency repair loan (Affiliate Link) can make sense if your vehicle breaks down, and you lack the resources to fix it. However, be careful about taking on extra debt while you still owe the bank. Take this step only after eliminating these possibilities first.

  1. Local charities or churches cannot fix your ride without having to order expensive parts
  2. The mileage or age exceeds the limits on any manufacturer or extended warranty plans
  3. The lemon laws in your state do not apply to your situation the warranty expired due to time or mileage
  4. You cannot tap into gap insurance because an accident did not lead to the malfunction

Financial Assistance

Auto repair assistance programs could help select drivers who still owe substantial sums on their loans, or could be underwater and cannot buy a more reliable ride. However, access is limited, qualifications are strict, and timely help for emergency needs is rare.

  • The government-run Temporary Assistance for Needy Families (TANF) provides resources for low-income families and encourage employment – which requires reliable transportation
  • Local charities, churches, and faith-based organizations often coordinate volunteer mechanics who donate their time and skills to fix clunkers for target groups such as single mothers, the disabled, the unemployed, college students, and veterans

Remember, getting your car fixed free of charge is an unrealistic expectation. Most volunteer mechanics swap out worn out parts for expensive new ones.

Auto Warranties

Vehicle warranties are the primary way drivers protect their finances from surprise mechanical failures while they are paying off their loans. New and used cars bought through dealerships often have these safeguards, and you might have extended the time and mileage limits with a second plan.

First, 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, which can vary across four categories.

  1. Bumper-to-bumper
  2. Powertrain
  3. Corrosion
  4. Roadside assistance

Then, check for any extended warranties you might have purchased. They kick in once you exceed the initial time or mileage limits. Many people sign up for these programs and forget they have them because the fees are baked into their monthly car payment or auto insurance premiums.

Lemon Laws

Research the auto lemon laws in your state if your new car keeps breaking down while you still owe money to the finance company. You could force the manufacturer to provide you with a replacement vehicle if you meet these criteria.

  • 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 is unable to rectify the 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.[1] Tap into this resource if you need help asserting your legal rights.

However, keep in mind that lemon laws typically do not apply when you buy a used car. You will need to find an alternative resolution for repeated breakdowns of preowned jalopies.

Gap Insurance

Gap insurance is unlikely to help out if your engine seizes or your transmission slips due to mechanical defect or general wear and tear. Gap insurance covers the difference between what your vehicle is currently worth and the amount owed on your loan – after an accident causes damage.[2]

Therefore, cross gap insurance off the list of ways to raise money for repairs unless you can tie the breakdown to an earlier crash. Sometimes problems are not apparent right away, particularly after a minor fender bender.

Also, do not attempt to commit fraud by intentionally causing damage to initiate a gap insurance claim. You are more likely to wind up behind bars than raise cash to pay the mechanic.

Disposing of the Vehicle

Getting rid of your car that does not run could be the better alternative if you are above water on your auto loan: the blue book value when operational exceeds the unpaid balance. The positive equity makes it easier to upgrade your ride at the dealer, sell it privately, or take it to the junkyard where they scrap it for parts.

Trade-In

Trading in your rattletrap at the dealership has a hidden silver lining for people who owe a small amount on their existing loan relative to the value. The dealer may assess the trade-in more highly because they can bring the vehicle back to life at a much lower cost.

Dealerships charge higher retail prices for auto parts and the mechanic’s labor when servicing the public (what you pay). However, their actual wholesale costs are much lower without the profit markup, as illustrated by this simple example.

 RetailWholesale
Blown Engine$4,000$2,500
Failed Transmission$3,400$2,000

Therefore, a dealer might find more equity in your bucket of bolts. The extra cash could help you retire your exiting balance, and apply the remainder towards the down-payment on something more reliable.

Sell As-Is

Selling your broken down car as is to a private citizen will prove challenging unless you can find a buyer with the mechanical skills needed to get the vehicle running again. However, the do-it-yourself market is minute, which limits the price you can charge – a critical element when you have an unpaid balance on your auto loan.

Instead, request an unsecured personal loan before the transaction and put yourself in a better bargaining position. Acquire enough funding to execute a trifecta enabled by a higher sales price.

  1. Cover the cost of repairs to increase your market size
  2. Pay off the remaining balance to acquire the title
  3. Make a substantial deposit on a more reliable option

Junk for Parts

You can also have a tow truck take your car to the junkyard even though you haven’t paid off a small amount to the bank. Of course, the auto salvage center cannot take legal possession of your vehicle without a title because the bank remains the owner until your loan balance reaches zero.

In other words, you have to come up with enough capital to retire your obligation in full. You have three avenues to secure the title.

  1. The scrap price exceeds the unpaid balance
  2. You make up the difference from your cash stockpile
  3. Take out an unsecured personal loan to fund the remainder

Usually, the value of anything is greater than the sum of its parts. Therefore, junking your car makes financial sense only when the cost of restoring the oil burner to full function is too high.

[1] Better Business Bureau Lemon Law Enforcement

[2] Insurance Information Institute – Gap Coverage