What happens when you’re faced with an unexpected car repair bill?
I love my 2008 Mercury Mountaineer. She’s a sparkly moondust shade of white so I call her my Lunar Lander or “Luna” for short. I love her so much that when the transmission blew two years ago and I was faced with the tough choice of a very large repair bill or putting her down, I lit a candle in remembrance.
Once I stopped the sniffles and put my brain back in my skull, I decided to weigh whether or not to just repair the SUV or replace Luna with a new one. Specifically, would spending $4,800 for the new transmission be worth it on a vehicle that had a then Kelley Blue Book value of, well, exactly $4,800? Essentially, I had a non-driveable car that was worth $0 based on that math!
In order to make that decision I broke out an amortization calculator to see how much it would cost me to replace the car vs. pay the $4,800. I also factored in that if I could get another three years out of the Mountaineer, repair would be worth it for me if the numbers held up.
Shopping around, I saw that it would cost me about $25,000 to find a comparably equipped newer used SUV. A $25,000 loan at 5% interest over 5 years would give me a monthly payment of $472. Compare that to the $4,800 for repairs at the same interest rate would take me just over 10 months and cost me only $411 a month. Spending $4,800 to retain a vehicle I already loved while not setting myself up for a debt I wasn’t prepared for seemed to make the most sense. Granted, other problems can occur with older vehicles but fingers can always be crossed.
New car sales way down
Looking at the volume of new car sales at Good Car Bad Car, there has been a whopping 33% drop in new car purchases when comparing Q2 2019 to Q2 2020. Not surprising considering the severe COVID related job losses and declining number of commuters due to the shift to work-from-home for many (anyone else experiencing a lack of stress during rush hour driving?)
Despite the current 0% interest rate offers dangled in front of us by auto manufacturers for those with great credit scores, a new car is simply no longer affordable to some or necessary for others that might otherwise consider one.
For those experiencing the dilemma of repair vs. replace, auto repair becomes more palatable even for the largest of repair bills. Speaking of repair bills, a study by Cars.com shows that the average estimate for car repairs is in the $500 – $600 range. A far cry from a $4,800 transmission job but still, unfortunately, out of reach for many. Fully ⅓ of vehicle owners can not afford repairs at that level without incurring debt.
Value of repair vs. buy
There are a few things to consider when deciding whether to repair or replace.
Can you extend the life of your car? If your math model shows that repairing your car is a better financial decision vs. buying a new car, paying for even large repairs may be worth it. Is the repair warrantied for a decent length of time?
What is your tolerance for monthly payments? If you take out a personal loan or use a credit card, will it be cheaper for you to make those repair bill monthly payments vs. what they would be if buying a new car? Will the cost of repairs be paid off in a shorter period of time?
Do you have a title for your car? That feels good! If your car is already paid off, do you really want a new monthly car payment?
What is the truly need? If you are working from home or don’t have heavy driving requirements, do you really need a new car right now? Can repairs comfortably allow you to hold off on buying that new car?
What I did
She may have been an old nag at 150,000 miles but, in the end, I plundered my new car savings fund (I knew I would need a new SUV eventually) and plunked down the $4,800 to repair the Lunar Lander. While doing my decision shopping I had even found an exact replica of Luna at a used car dealership online – same color, features – everything! Asking price? $4,500. $4,500 for a potential question mark was not worth it compared to $4,800 for a new transmission with a 3-year warranty!
And I’m glad I did. The new computer, throttle body sensor, sway bars and other routine maintenance since then has furthered to extend Luna’s life – 160,000 miles and counting! This morning’s Amelia Island drive to SUV Beach reminds me of how great this car is. I plan on getting another three years out of her.
Affording repairs or purchases
But what if you don’t have ready cash for an auto repair emergency? Or, what if you decide that replacing your car makes more sense but you don’t have enough for a down payment? (According to AutoTrader the recommended down payment for a new car is 10 – 20% and, according to Edmunds.com, the average for a used car is 11%. Keep in mind that a new car will depreciate by 20 – 22% as soon as you drive it off the lot. Ouch! That’s a really expensive first trip home!)
Some of the most common ways to obtain the repair or down payment cash needed include personal loans, payday loans, title loans and borrowing from friends and family. A quick peek at each:
Friends & Family Loans. $Billions are transacted each year between friends and family in the relationship-based lending market. These loans offer extreme advantages compared to traditional bank and commercial lender based options. Advantages include:
- Small loan flexibility – just need $400 to fix your brakes? Ask a friend!
- No credit check or application process
- Flexible loan repayment terms agreed to by the two of you – not by a bank
- Low interest rate – you decide how you are going to reward the lender. Why pay over 300% to a predatory PayDay lender?
- Your car title is not required (but you could choose to use your vehicle or something else as collateral to show that you fully intend to pay back the loan!)
Personal Loans. Credit checks are required for obtaining a personal loan, so having a good score matters. It doesn’t mean you can’t find a lender that can help though. Interest rates can be upwards of 35% and it may be difficult to get a loan under $1000.
Title Loans. If your car is paid off and you hold the title, a title loan may be a decent choice. To get the loan, you hand over the title to your car and if you don’t pay back the loan as agreed, you give up the title forever. And your car. Nobody wants that.
PayDay Loans. PayDay loans simply require that you show proof of income and then you can be granted a loan. Keep in mind that PayDay loans have the highest interest rates around and ongoing investigations into potential usury violations are in play. Case in point: the Veterans & Consumer Fair Credit Act. If you are already struggling for cash, PayDay loans only serve to deepen the abyss of debt.
How to borrow from a friend
If you believe that your best option is to ask a friend or family member for a short-term loan to get you through your car crisis, be sure to document and track the loan to ensure that you will responsibly pay back what you’ve borrowed. Verbal loans frequently turn sour (50% of the time!) and what you never want to do is ruin a relationship – especially one where the other person graciously helped you out!
How LendAmi can help
LendAmi is an online platform that lets people create their own loan terms, agree to them together and then fund and pay back the loan using bank ACH. By removing the guesswork out of what was agreed to verbally, LendAmi provides borrowers the ability to request a loan with greater confidence and relieves the lender from the awkwardness of having to ask for repayment. The LendAmi person-to-person lending platform removes the stress all around!