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What happens to the car loan if you bought a lemon?

Most people do not pay cash for their new or new used vehicles, which means that they have a car loan that they are paying each month. One reason to buy a new or expensive used car is to ensure that the vehicle is reliable and safe. But what happens when the vehicle turns out to be a lemon? As is always the case with loans, it is best to avoid costly mistakes, but it quickly gets complicated when the loan involves a car that does not function properly and qualifies as a Lemon.

Continue to pay the loan

Let’s set aside the Lemon Law process for a moment and focus on how to handle loan issues if the vehicle owner plans to file a Lemon Law claim. The most important thing to remember is that the vehicle owner should continue to make car payments even if they are opted to pursue a claim. If the owner does not make payments, the vehicle may be repossessed, and the owner will then lose any rights they have to a replacement under the law.

It is also smart to check with the lender early in the process to find out how filing a Lemon Law claim will impact the loan and what changes if the owner receives a replacement vehicle. Experts even recommend asking the company handling the car loan how they address Lemon Law issues before the buyer ever signs on the dotted line to buy the car.

What happens to the loan balance when there is a repurchase?

Those who choose to repurchase a vehicle will generally get a refund that includes:

  • The purchase price minus any rebates, taxes, registration and title fees
  • The cost of insurance and related fees when the vehicle was out of service
  • Less the depreciation that came from using the vehicle before the onset of the defect

The impact upon the loan if the vehicle is replaced

The choice to have the vehicle replaced means that the manufacturer trades the owner for working equivalent of the defective vehicle. There will likely be offset the cost from using the vehicle before the defect emerged.

The owner will need to check with their lender to see how a replacement affects the loan agreement. They may also need to renegotiate the terms of the loan (including interest rates, terms, monthly costs, and other expenses). It is best to have this discussion before making a final decision on the vehicle replacement.

Complicated issues require steady guidance

Sometimes a vehicle just does not work right, and the owner is left with no option. The process of replacing the vehicle will take patience, planning and time. An experienced Lemon Law attorney can guide clients through this complicated process to avoid missteps and help ensure that the end result is a new vehicle that functions correctly and safely.

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