By Mike Jones, President & CEO of autopom! Insurance Services, llc
As a lender, you know that financing a vehicle is a significant responsibility. It’s crucial to consider the borrower’s ability to make payments and the potential risks associated with the vehicle itself. Auto repair costs are one of those risks. Unexpected car breakdowns can lead to missed payments and, in some cases, default. Lenders must find ways to protect their bottom line.
High Auto Repair Costs and Financial Problems
Mechanical repair costs can be quite high, especially for older vehicles or those with high mileage. According to insurance marketplace The Zebra, the average car repair costs range from about $300 to $500. This range can quickly rise depending on the type of work needed. For instance, replacing an engine can easily cost thousands of dollars.
Unfortunately, many borrowers are unprepared for these expenses. They may not have an emergency fund or have considered the cost of repairs when budgeting for their car payment. When an unexpected repair bill comes due, borrowers often have to choose between making their car payment or paying for auto repair costs. This decision can lead to loan delinquency or default, which will negatively impact the lender’s financial position.
Why Are Auto Repair Costs a Risk to Lenders?
When a borrower defaults on a loan, it can be costly for the lender. Not only do they lose the income from the loan, but they may also have to repossess the vehicle, which can be a lengthy and expensive process. In addition, the vehicle’s value may have decreased significantly due to the needed repairs.
The lender can try to sell the vehicle to recover the remaining balance on the loan. However, if the car is worth less than the cost of the repairs, the lender may not be able to recover the full amount owed. The lending company will either have to pay to repair the vehicle or sell it at a severely discounted rate, both leading to losses.
Lenders may also face legal risks if they are found engaging in predatory lending practices. For example, if a lender knowingly loans money to a borrower who is unlikely to repay the loan, or if a lender charges excessively high interest rates or fees, the lender may be subject to legal action.
Dealing with issues like auto repair costs can cause significant damage to a lending business and lead to long-lasting problems. To prevent such situations, it’s crucial to implement systems that ensure borrowers can pay their bills without being burdened by unexpected expenses related to car repairs.
Preventing Default Due to Mechanical Repairs
Lenders should always remember that they are in a relationship with the borrower until the car is paid off, and both parties are vulnerable in the case of a default. Auto lenders that nurture that relationship and provide security have a better chance of recouping all of their investment than companies that try to let borrowers fend for themselves when paying for car repairs while keeping a loan in good standing.
To prevent default due to repairs, lenders can and should take several steps to help keep the car in good condition. Combining these ideas can offer better protection for your investments.
Lenders can encourage borrowers to budget for routine maintenance and unexpected repairs when purchasing the vehicle. This can come through educational materials or by requiring borrowers to attend a financial education course. Lenders can also offer maintenance services through the dealership that sells the car or a partnership with an auto shop.
Lenders can require borrowers to carry comprehensive and collision insurance while financing the vehicle, which will cover auto repair costs if the vehicle is damaged in an accident. This step is especially important for borrowers with high-risk driving records or who live in areas with a high incidence of accidents or theft.
Vehicle Protection Plans
Lenders can offer vehicle protection plans or service contracts that cover the cost of mechanical repairs. These contracts can be sold as an add-on to the loan and provide borrowers with peace of mind knowing they will be covered if their car breaks down. To find suitable options for different circumstances, contact Mike Jones at autopom! (949) 309-2526.
Work With Borrowers
Lenders can work with borrowers struggling to make their car payments due to unexpected repairs. This collaboration may involve offering temporary forbearance or modifying the loan to include the cost of the repair. By working with the borrower, the lender may avoid default and ultimately recover the amount owed.
The Consequences of Vehicle Defaults
If a person defaults on a car loan because of high auto repair costs, it leaves everyone in a bad position. The long-lasting repercussions for the lending company can be complicated and costly.
In some cases, the lender may pursue legal action to collect the deficiency balance. While this can help reduce losses, it’s a huge undertaking to go through the legal process. Lenders have to pay for lawyers and court fees, and there is a chance that the borrower may ignore a final judgment and still not pay what is owed.
All of these potential outcomes show why it is better to manage the risks of high auto repair bills before they get in the way of timely payments. Taking early action can be much less costly than dealing with a delinquent borrower and a damaged vehicle.
Take Control of Auto Repair Costs With a Vehicle Protection Plan
The high cost of mechanical repairs is a hidden risk that lenders should be aware of when financing a vehicle. By encouraging borrowers to budget for routine maintenance and unexpected repairs, requiring comprehensive and collision insurance, offering extended warranties or service contracts and working with borrowers struggling to make payments due to unexpected repairs, lenders can mitigate this risk and avoid the costs associated with default.
To learn how autopom! can help protect your financial institution and borrowers from high auto repair costs, contact Mike Jones at (949) 309-2526.