Can Lemon Law get you out of an underwater car loan? The answer is yes, if the car qualifies for a Lemon Law claim.
COVID-19 Spurred Underwater Car Loans
An “underwater” car loan is the same as an “underwater” mortgage: the value of the asset is far, far below the outstanding balance of the loan. During the new car and computer chip shortages that occurred during the COVID-19 pandemic, many consumers had to pay a premium well above the manufacturer’s suggested retail price (MSRP) to get a new car.
One survey found consumers willing to pay 39% over the sticker price to get the car they wanted. These were underwater car loans as soon as they were signed.
Car buyers are now waking up to a cruel reality: There is no easy way to get out from an underwater car loan. What you paid for a vehicle during the pandemic does not matter. Depreciation is still calculated based on the vehicle’s MSRP. In other words, if you spent $60,000 for a $40,000 car, the car still depreciates from $40,000. The premium you paid vaporized, and with new-car inventory rising, there is almost zero chance of reselling that vehicle at a premium. Dealers will not honor the inflated purchase price if you trade the vehicle in. You are truly underwater.
Lemon Law Is the Last Hope for Underwater Car Loans
This is the first time in automotive history that you were lucky to buy a lemon. State Lemon Laws provide a refund based on the vehicle’s purchase price, not its MSRP or book value, allowing you to get some of your overpayment back. This is the only option available for those with an underwater car loan, but you have to qualify for a Lemon Law claim to take advantage of it.
A vehicle is eligible for a Lemon Law claim if it meets the following criteria:
- You purchased or leased the vehicle new from a dealership, generally within the last 2 years and with less than 20,000 miles since you took delivery. Used cars are not eligible for the same Lemon Law protection.
- A dealership has made 3 or more failed attempts to fix the same problem. Repairs must have been attempted by a dealership or a manufacturer-authorized repair center.OR (and this is the most helpful situation)…
- The vehicle has been in the shop for repairs for 30 or more cumulative days.
Some states, such as New York, give dealerships an exemption if parts are not available. Other states do not offer this exemption. The best-case scenario for those with underwater car loans is a vehicle that spent a lot of time in the shop because parts were delayed. You do not need 3 or more repair attempts if you cross the 30-day threshold.
Getting Out of an Underwater Car Loan with Lemon Law
If your vehicle qualifies, you are entitled to a refund of the purchase price, including any overpayment you made, minus depreciation based on a standard mileage formula. Depreciation is based on mileage the first time you took the car in for repairs, not the vehicle’s current mileage.
For example, if you have a problem car with 15,000 miles on it that a dealership first tried to repair at 5,000 miles, depreciation will be calculated at 5,000 miles, the time when the defect first appeared.
Defects that impact the value or safe operation of the car qualify for Lemon Law protection, while cosmetic defects do not. A leaky sunroof or trim that falls off will not qualify for the Lemon Law, but problems with mechanical and electrical systems almost always qualify.
The huge benefit to car buyers is the opportunity to get out of an underwater car loan. If you have a vehicle that spent 30 or more days in service, you may have a way out, even if the problem has been repaired.
Talk to a Lemon Law Attorney About Your Underwater Car Loan
There is no charge for a Lemon Law case evaluation at Bad Vehicle, and there are no out-of-pocket costs for our services. Legal fees are deducted from your settlement, and you pay only if win your case.
Contact us online or call us at 1-855-223-8344. A Lemon Law claim could help you get rid of that underwater car loan and allow you to recover some of your excess payment. Remember that if you trade in or sell your vehicle, you will need to price it at its current book value. The extra money you paid will not factor in to a purchase or trade offer at a dealership. If you qualify, the Lemon Law may be the best way to recover from a difficult financial situation.