Auto Repair Loans: How to Use a Personal Loan to Fix Your Car

If your car breaks down, you need more than a good mechanic. You need to pay for those repairs. And if your emergency savings won’t cover them, auto repair loans can fill the gap.

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Auto repair loans to avoid

Some financing advertised for auto repair is actually a title loan, cash advance or payday loan. That’s almost certainly true if you see the term “no credit check” anywhere on the offer. And even credit cards can have serious drawbacks.

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Why you shouldn’t use a payday loan for auto repair

Payday loans can be very deceptive. They may seem harmless, and providers like to say that their fees are less than what banks charge for bouncing a check. But that’s not the whole story.

In fact, according to the Center for Responsible Lending (CRL), payday loan interest rates average a whopping 391% APR (annual percentage rate). Payday loans are structured to force borrowers into repeated renewals, with a slew of fees every time. In fact, the typical payday loan borrower rolls over 10 loans per year. It’s common for the fees to exceed the original amount owed, forcing borrowers into delinquency on other bills, overdraft fees, and involuntary loss of bank accounts.

Related: What Credit Score Is Needed for a Personal Loan?

Why auto title loans may be even worse

Auto title loans are secured by your (paid off) car. And car title loans tend to be even more expensive than payday loans. According to the Federal Trade Commission, the average fee to take a $500 auto title loan runs $125 (that’s 25%!). And there are usually additional charges.

According to the CRL, typical car title borrowers renew the loan eight times! So you can see how you might owe more in fees than the original balance. If you renewed the average $500 loan eight times, you’d owe $1,000 in fees alone! And, says the CRL, one in five auto title borrowers loses their vehicle because this kind of debt is unaffordable. And because title lenders have no incentive to make sure that you can afford the payments.

The drawbacks of credit cards for auto repair

If you manage debt well and have available credit for emergencies, credit cards can be convenient and appropriate. The advantage is that you already have them and don’t need to apply for a loan when time is of the essence.

But if you’re carrying a lot of revolving debt, a car repair on top of that could make things worse — especially if it maxes you out. High credit utilization can harm your credit score (consumers with good credit scores don’t generally use more than 30 percent of their available credit lines). And credit cards often have high interest rates (averaging nearly 17% as of this writing) and can take a long time to pay off.

In any case, everybody’s situation is different. Hopefully you’ll have time to crunch the numbers rather than rush into any decisions.

Related: Auto Loans vs Personal Loans (Which Are Better?)

Advantages of a personal loan for auto repair

Personal loans have a few advantages over other types of auto repair loans.

Generous borrowing limits

Personal loans are widely available in amounts up to $40,000. Obviously, your limit depends on your credit score, income and your lender’s policy. But maybe you can get more than just the timing belt replaced.

Fixed interest rates

Most credit cards have variable interest rates, so if you carry a balance your minimum payment can be hard to budget. Personal loan interest rates are usually fixed, which makes financial planning easier.

Fast transaction

That is, often you’ll have the money the next day. If your car is in a garage, awaiting repairs, getting money quickly is probably important to you.

Lower interest rates

The average personal loan interest rate, as of this writing, is 10.7%. While the average credit card interest rate is just under 17%. If you can use your credit card to earn rewards, and then pay it off with a personal loan, you can get the advantages of a card without paying its higher interest rate.

Related: Personal Loan Interest Rates (How to Pay Less)

Potential to improve credit score

Hitting your credit card can increase your utilization and drop your credit score. But you could fix your car with a personal loan instead and avoid this problem. Even better, if you’re currently carrying credit card balances, you might be able to borrow enough to repair your car and pay off your cards. That should save you money and improve your credit score.

Get back on the road

Car trouble can mean money trouble, and auto repair loans can harm your finances if not managed correctly. A personal loan for auto repair can improve your credit score, depending on your financial situation, and get you back on the road fast.

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