How Your Car Loan Is Affected If You Bought a Lemon

Automobiles are complicated products. Given that complexity, it’s amazing that most new cars roll off the assembly line so consistently trouble-free.

But every once in a while, there’s a problem that simply won’t go away, even after several visits to the dealership for service. If you find yourself in that situation, you may be able to return your vehicle to the dealer for a full refund or replacement, thanks to federal and state lemon laws.

What if you have taken out a loan on your car, and it turns out to be a lemon? You're still entitled to a refund or replacement, as long as you make sure your lender gets their due.

What Is a Lemon Law?

The term lemon is used to describe a vehicle that has severe defects that might impact how safe it is to drive or how well it runs. Lemon laws are designed to compensate buyers for cars that fail to meet standards of quality after several attempts at repair.

There are lemon laws on the books in every state in the nation, as well as on the federal level. The details vary from state to state, but basically, lemon laws work like this: If you purchase a new vehicle that has a defect or condition that impairs its value and it has not been repaired after several attempts (typically three or four trips to the dealer), you should be compensated for the defect.

In most cases, you will have to go through an arbitration process and possibly further litigation. The remedies vary by the type and severity of the problem. The maximum remedy is either the complete repurchase or replacement of the vehicle, usually at your choice.

What About Your Loan?

There are a number of factors to consider regarding your loan if you intend to pursue a claim under an applicable lemon law, but the first thing to keep in mind is this: You must continue to make your loan payments throughout the legal process. This is very important. If you do not, your vehicle may be repossessed, and you could lose any rights you have under the lemon law.

Also, you should contact your lender early in the process to let them know that you are pursuing a lemon law claim and find out how your loan will be affected if you choose to receive a replacement vehicle as your remedy option.

Repurchase

If you choose repurchase as your remedy, you may be entitled to money beyond the purchase price. For example, California's lemon law states you are entitled to the purchase price (not including any manufacturer rebate) and any “collateral charges,” such as sales and use taxes, registration and title fees, insurance costs (for the time your vehicle was out-of-service) and other related costs. The refund amount will be offset by the value of any use of the car by you before the onset of the defect.

In regard to your loan, the balance will probably be paid from your refund directly to the lender by the manufacturer. Keep in mind that any offset for use will be deducted before the loan balance is paid off. It is possible, therefore, that in cases where there is a particularly large loan balance and high mileage on the vehicle, the refund after offset may not cover the entire loan balance. If that happens, your lender may demand the difference.

Replacement

If you choose to have the manufacturer replace your vehicle, the new vehicle would be identical or equivalent to the one it is replacing. You may also be compensated for reasonable incidental expenses.

As for your loan, it is important to know how your lender will handle any agreement on the new vehicle. If you purchased the lemon car with special discounts or financing deals, the manufacturer might not be required to offer them for your replacement car.

No one should have to keep fighting to fix a car that was broken from the start, and no one should sacrifice safety by driving such a car on the road. Document all repairs, stay informed of your rights and obligations and work with your lender and manufacturer to reach an acceptable solution.