Prospective car buyers have been suffering from sticker shock as prices remain elevated due to pandemic-era supply shortages, but current car owners are also suffering. The cost of repairs and maintenance has also skyrocketed, leading many drivers to take on debt just to stay on the roads.
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Here’s a look at why car owners are going into debt, plus advice for financing car repairs if you can’t pay out-of-pocket.
Nearly 1/3 of Americans Took on Debt To Pay for a Repair in Recent Years
A new study by Jerry found that 29% of American vehicle owners took on debt to pay for a car repair in the past two years.
Repairs have become unaffordable for some, as prices for service have soared due to the higher cost of parts stemming from supply-chain disruptions, as well as higher costs for labor due to a shortage of auto technicians.
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“Inflation has stretched everyone’s budgets thin, and nowhere more so than in the area of car ownership, whether it’s vehicle prices or insurance or repairs,” said Henry Hoenig, data journalist at Jerry. “The cushion that many Americans typically built into their budgets for unexpected expenses, like car repairs, is dwindling or entirely gone. In fact, a fourth of car owners said they wouldn’t be able to cover a $500 car repair bill tomorrow, and more than half wouldn’t be able to afford a $3,000 bill.”
High Cost of Repairs Is Taking a Toll on Gen Z in Particular
The Jerry study found that younger generations were more likely to borrow money for repairs, with nearly half of Gen Z (46%) saying they did so, compared with only 29% of the general population. Gen Z is also the most likely to default on the debt they took on to pay for car repairs, with 19% reporting a default. The rate was 12% for millennials, 4% for Gen X and less than 1% for boomers.
“Younger generations typically earn less and have less savings. That is definitely the case for Gen Z, the oldest members of which are really just getting started in their work lives,” Hoenig said.
With car repair costs at a high, it’s even harder for those with lower earnings to afford to make them without taking on debt.
“Today, the average monthly car payment is over $700 for a new car and over $500 for a used car, which is unattainable for many — not just Gen Z,” Hoenig said. “For younger people especially, spending that much on a car payment, not to mention paying for insurance, leaves very little in the bank to cover any repair costs.”
Because Gen Z is relying on loans to pay for repairs, they then have interest to worry about on top of the initial expense.
“With 13% taking out a bank loan and over 9% taking out an auto title loan, they’re paying interest on that money borrowed, further digging into a financial hole,” Hoenig said.
3% of Car Owners Borrowed More Than $10K for a Repair
Some owners are borrowing significant amounts of money to pay for their repairs. Nearly one in five (18%) of those who needed to borrow money took on more than $3,000 in debt, while 3% borrowed more than $10,000, the study found.
That finding begs the question — is it really worth it to borrow $10,000 or more to finance a car repair? Or should you just get a new car at that point?
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“Looking at your car’s value is a good place to start,” Hoenig said. “The value is determined by the age of the car, mileage and current condition. Every situation is different, but generally, when the car’s value is low relative to the cost of the needed repair, buying a new car is worth considering.”
Of course, not everyone can afford to buy a new car — so paying for a repair, even an exorbitantly expensive one, may be the cheaper option.
“If you can’t afford to buy a new car, due to the market or your own financial situation, you may find yourself repairing your car for more than it is worth anyway, simply because you need to drive and you can’t afford another car,” Hoenig said. “1 in 5 American car owners say they would definitely or probably lose their job if their car broke down and they weren’t able to repair it.”
What Are the Best Ways To Pay for a Car Repair?
If you need to borrow money to pay for a car repair, you have a few options, such as putting it on a credit card, borrowing from friends or family members, taking out bank loans and taking out auto title loans. But before you even figure out how you will get the money, you first need to ensure you’re being quoted a fair price.
“First, you should shop around,” Hoenig said. “We know from calling many repair shops to get quotes that the cost of getting the work done can vary significantly depending on where you go. Get at least three quotes. If you do that and determine the repair can’t be paid with money you have today, taking on debt may be your only option, though it’s not ideal.”
Borrowing money from friends and family can get messy, but it’s typically the most cost-effective way to fund a repair.
“If your family isn’t able to help, a low-interest loan is likely your best option,” Hoenig said. “Some repair shops also offer financing, but be sure you get reasonable terms. Any of those options would help you spread out the cost of the repair.”
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This article originally appeared on GOBankingRates.com: Car Affordability Crisis: 29% of Americans Are Taking on Debt To Pay for Repairs
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