When Your Loan Outlives Your Car

It’s a tough situation. Many working families need to borrow money to finance a car just to get to work. If you can afford a new car, your warranty should see you through the term of your loan on most major repairs. But many used cars don’t come with warranties. If the car breaks down, you’re still on the hook.

The vast majority of car loans are just that: loans. The bank, credit union or consumer lender makes the loan in good faith, and you are expected to pay back the money on schedule – regardless of the condition of the vehicle. But if the vehicle is disabled while you still owe money on it, you may find yourself in a bind. Here are some things you can do to lessen your exposure.

Keep your insurance current. 

This is a big help, because if you lose the use of your car due to theft, or – if you carry collision insurance – accident, your insurance company will reimburse you to pay off your loan. This will theoretically help you qualify for a new loan for another car. The only thing you are out is your deductible – so make sure that whatever your deductible is, it’s an amount you can afford to lose. Many car loans require insurance as a condition of the loan, so check the fine print on your loan agreement.

Note: Collision insurance is expensive. Many people choose to go without it, especially on older cars. That can lower your monthly premiums by quite a bit and make it that much easier to save money.

Don’t skimp on maintenance. Many breakdowns are preventable – or they can be delayed until after you’ve paid the car off. But don’t neglect routine maintenance to help keep it running well. Check the oil. Change your oil and filter as scheduled. Use the correct transmission fluid, brake fluid and coolant. Keep your tires balanced. Monitor their wear. Rotate them. Don’t neglect the spare. Pay special attention to your tires as you transition from one season to another. Bad tires cause accidents.

Buy “gap” coverage. Unless you come up with a large down payment, chances are you will, at some point, owe more on the loan than the car is worth. If you crash your car, your insurance company will reimburse you only up to the insured value of the car. But if you own “gap” coverage, your insurance company will reimburse you enough after an insurable event to pay off the loan.

Consider the warranty. Think about purchasing the warranty on your used car, if one is available. If a major engine, transmission or drive train issue is a risk you can’t afford to bear, then you might need to consider buying the warranty. Otherwise, you run the risk of owing money on a car you can’t even drive. Don’t take risks you can’t afford to lose.