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If your car breaks down and you don’t have the money saved up to fix it, you have a few options for financing, including personal loans.
Not having enough money in the bank is a common scenario. A recent survey found that one in three Americans don’t have any emergency savings. That’s why turning to credit cards, friends and family, or personal loans is a typical situation. Personal loans may be more affordable than a high-interest credit card. Below, you’ll explore the pros and cons of using personal loans for car repair as well as some alternatives.
Key Points
• Personal loans can offer quick funding for car repairs..
• They help avoid high-interest credit card debt and ensure timely repairs.
• Drawbacks include increased debt, fees, and potential credit score impact.
• The personal loan Application process is flexible, available online, in an app, by phone, or in person.
• Financing alternatives like credit cards, title loans, or payday loans can carry high costs and therefore a level of risk.
What Personal Loans Are and How They Work
A personal loan is a loan from a financial institution that borrowers can use for a wide range of purposes, from weddings and vacations to debt consolidation and medical costs to home renovations and, yes, car repairs. You’ll repay your personal loan, plus interest, over a set number of months.
As you start to explore your options, it helps to understand how personal loans work and the different types of personal loans available.
Pros and Cons of Personal Loans for Car Repairs
Taking out a personal loan to cover the cost of car repair can be helpful, but are there drawbacks to consider? Here, review the pros and cons:
| Pros | Cons |
|---|---|
| Fast funding to cover repairs | Increased debt |
| Protection of your family’s safety on the road | Upfront fees |
| Ensures you can still drive to and from work to generate income | Temporary drop in credit score |
| Avoids high-interest credit card debt to cover repairs | Less room in monthly budget |
Pros
Here, the benefits of using a personal loan for car repairs:
• Provides fast funding to cover repairs: Many personal loans offer same- or next-day funding, which means you can pay for car repairs quickly and get back on the road.
• Prioritizes your family’s safety on the road: Without access to cash, some drivers may be tempted to forego necessary repairs and put themselves, their families, and other drivers in danger by driving with a damaged vehicle. A personal loan allows you to pay for damage now at a potentially lower cost before the issue grows and becomes more expensive to fix.
• Ensures you can still drive to and from work to generate income: Despite the advent of remote working, many people still rely on their vehicle to get to and from their job. Without it, you’ll need to pay for rideshare or a car rental or depend on the kindness of a coworker to give you a lift. Otherwise, you may need to skip work and miss out on that pay. Repairing your car quickly with a personal loan helps ensure you can get yourself to and from work on time.
• Avoids high-interest credit card debt to cover repairs: Many Americans reach for their credit card to cover the cost of emergency car repair. However, such debt can be hard to overcome since it’s high-interest debt, currently averaging over 20%.
Cons
Now, consider the potential disadvantages of using a personal loan for car repairs
• Increased debt: The biggest drawback of taking out a personal loan is the increased debt. Sometimes debt is necessary, like taking out a mortgage to buy a home or getting a student loan to pay for college. However, if it’s possible to avoid debt for small expenses like car repair, you typically should. That said, fixed-rate personal loans may be a more manageable form of debt for borrowers than a variable-rate credit card.
• Upfront fees: Many personal loans come with origination fees at the start, especially for borrowers without great credit. These fees, plus the interest on the loan, mean you’ll end up spending much more for the car repair than you would if you paid out of pocket.
• Temporary drop in credit score: While many lenders allow you to prequalify for a personal loan without an impact on your credit score, there will be a hard inquiry on your credit report when you officially apply. Such hard inquiries temporarily lower your credit score, but don’t worry: Your score will likely rebound over time, and if you responsibly manage your personal loan, you may even see it grow higher than when you started.
• Less room in monthly budget: When you take out a personal loan, you’ll have fixed payments for a set number of years. It’s crucial that you make these payments every month and on time. That means you’ll have a little less room in your budget until it’s paid off. If you’re living paycheck to paycheck or struggling to build your emergency savings, this tighter budget can be problematic.
Recommended: What Are Average Interest Rates for Personal Loans?
How to Use a Personal Loan for Auto Repairs
Personal loans are straightforward. Aside from a few restrictions that vary by lender, you can use personal loans for almost anything. You’ll apply and, upon approval, have the funds deposited in your checking account. Then you can take that money and pay the mechanic directly to repair your car.
Applying for a Personal Loan
So how do you get a personal loan for car repairs? First, make sure you meet a lender’s requirements, and then you can go through the application process.
Requirements
These are the typical personal loan requirements you’ll need to meet to get approval:
• Credit score: Each lender will have its own personal loan credit score requirements. If you have bad credit, don’t sweat it: There are lenders out there with personal loans for poor-credit borrowers. Just expect to pay higher fees and interest.
• Collateral: Many personal loans are unsecured, meaning you don’t have to put up any collateral. However, if you are struggling with your credit score, you may have an easier time getting approved (and at a lower rate) if you’re willing to put up collateral, such as your car.
• Proof of income and employment: Lenders want to know that you have a means of repaying the loan. To that end, you may need to prove that you’re employed — and that you make enough to cover the monthly payment.
• Debt-to-income ratio: Lenders commonly analyze your debt-to-income (DTI) ratio, which compares your monthly debt payments vs. the amount of money you make in a month. The lower the ratio, the more likely you are to be approved.
• Origination fee: Some personal loans may include an origination fee to be paid up front, often expressed as a percentage of the loan amount (somewhere between 1% and 10%). You may be able to pay this out of pocket, but often lenders roll it into the loan’s total cost or even deduct it from the loan amount you receive.
Recommended: Compare Personal Loan Rates and Terms
Application Process
When you’re ready, you can apply for a personal loan online, over the phone, in an app, or in person (it’ll vary by lender). You’ll usually hear back about approval quickly — and may even receive the loan funds on the same day.
Many lenders let you check your personal loan rates and eligibility online before you apply. There’s no hard credit inquiry for this, so it’s a nice way to see if you qualify and compare lenders.
Alternatives to Personal Loans for Auto Repairs
The ideal alternative to getting a personal loan to fix a car is paying with cash from your emergency fund. But if you don’t have an emergency fund — or don’t have enough saved up yet — paying with credit is your main option.
Personal loans are a top option, but there are some alternatives to personal loans for auto repairs:
Credit Cards
Many mechanics will let you pay for auto repair with a credit card. This can be an attractive option if you have a rewards credit card that pays cash back.
The problem is that many borrowers have variable-rate credit cards with high APRs. If you don’t pay off the debt quickly, the interest charges will start to rack up.
Title Loans
Title loans allow you to use your car as collateral to secure funding. It’s a common option for bad-credit borrowers who can’t afford car repair, but be cautious: These loans are short-term, and if you don’t repay yours, the lender will take your vehicle from you.
This is a last-resort loan. For most borrowers, there’s likely a better, safer option.
Payday Loans
Payday loans are convenient for borrowers who need cash now, because there’s usually no credit check or collateral, and you can get the money right away.
The catch? These predatory loans can have high fees and interest rates reaching 400%. When it’s time to repay the loan (your next payday), you might find that you can’t afford to repay it — and you’ll have to take out a bigger loan to pay off the first one.
If you’re thinking about a payday loan for car repair, it’s a good idea to reconsider. Payday loans can lead to mounting debt and bankruptcy. And even if you pay yours off, it typically won’t help build your credit score (most lenders don’t report on-time payments to credit bureaus).
Instead, you might want to consider other alternatives, like secured personal loans or even a loan from friends and family.
The Takeaway
Personal loans for car repairs may be a smart option when you don’t have the cash on hand. With a personal loan, you can get fast funding to pay for the repairs within a day or two, and the small available loan amounts mean you don’t have to borrow more than you need. There are some alternatives to personal loans for auto repairs, including credit cards. However, if you’re unable to pay off what you owe quickly, the interest charges will begin to pile up.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
Can personal loans be used for car repairs?
Yes, you can use personal loans for car repairs. In fact, unexpected emergencies such as car repairs are a very common use case for personal loans. You can use personal loans for almost any legal purpose.
What sorts of financing can you get for a vehicle repair?
Drivers who can’t afford vehicle repair with their own emergency savings can consider a number of financing options, including personal loans and credit cards. While title loans and payday loans are alternatives, they’re generally a risky solution that could lead to car repossession, major debt, or even bankruptcy. Similarly, some mechanics may offer their own financing, but the interest rates can be very high.
Is getting a personal loan to repair a car a good idea?
If you can’t afford to repair your car out of pocket, a personal loan can be a good idea. Personal loans may have lower rates than a credit card, and making on-time payments on your loan could even help build your credit score.
Photo credit: iStock/demaerre
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