Most Americans Can't Pay for Car Repairs, 4 Tips to Help
According to a recent survey by AAA, 62 percent of American drivers would not be able to pay $2,000 for car repairs without going into debt with a credit card or asking for money from friends or family. While the savings rate is positive, it’s not common for consumers to put aside a portion of these savings specifically for car repairs. Many New York residents are likely dealing with this issue right now. Just a few days ago, a hail storm tore through some areas of Queens and Long Island. Social networks like Facebook were buzzing with videos of the storm as well as photographs of tennis ball-sized hail and the resulting damage.Banking Deal: Earn 1.55% APY on an FDIC-insured money market account at CIT Bank. See details here. CIT Bank. Member FDIC.
Comprehensive insurance typically covers this type of damage, but not everybody has comprehensive insurance. The survey’s results suggest that 20 percent of drivers needing $2,000 for repairs like windshield and body damage caused by hail will put the repairs on a credit card because they don’t have the money in a bank account while 11 percent will be asking around for help or taking money out of their home equity or retirement accounts.
There are a few approaches to take to help prepare a household’s finances for a car repair emergency. For the most part, it’s the same as preparing for any emergency. There are a few tactics related to cars that would be helpful to consider.
- Buy low-value cars. There is a strong case for buying well-used cars at great prices. Owning old cars are possible and worthwhile, particularly if you don’t need to drive excessively and you responsibly maintain the car’s performance. When Mother Nature or a crazy drunk driver brings damage to your old car, you don’t feel as great a loss as you would if the same damage afflicted a new car.
- Buy new or late-model used cars. The typical advice experts offer is to avoid brand new cars because a new car loses the most value the minute you drive it off the dealer’s lot. Depreciation is mostly irrelevant if you own the car forever, though. Then again, many people who plan to own their new car forever and use this as a rationalization for buying a used car don’t accurately predict their predictions several years in the future.
- Continue making “car payments” to your savings. If you do buy a car and have an associated car loan, once you make your last payment, start transferring the same amount to a designated savings account. For example, if you’ve been paying $300 a month for the past five years for your no-longer-new car, rather than increasing your spending once you’ve paid off the balance of the loan, start depositing a monthly $300 into a high-yield savings account. Many banks let you customize the name of your account, so every time you transfer money, you’ll remember that it is designated specifically for your “Car Repair Fund.”
- Consider comprehensive insurance. Unlike liability insurance, which covers the damage you cause to other vehicles, the type of insurance that covers damage caused by nature or an unidentified individual is not required. Lenders may require comprehensive insurance during the life of the loan, but once you own the vehicle without debt, you can remove comprehensive insurance. It may be worthwhile to continue the insurance anyway, particularly if the value of the car is still greater than the cost to repair typical damage. It may be cheaper to self-insure — using the technique in the bullet point above — but continuing insurance is a valid option.
Are you financially prepared for damage to your car?
Photo: Dakota Kingfisher