Purchase of a car with residual value, d.h. a car that was previously declared a total loss can be a great way to acquire a vehicle cheaply, but it can be more difficult to obtain a car loan or obtain car insurance if it is a salvage or restoration car.
Still, salvage or rebuilt title cars can seem like hard deals to miss because buying a salvage title sold at auction or a rebuilt title can afford you a make and model of car that might otherwise be far out of your price range. But if you plan to buy a salvage title, don't count on a car loan from a big bank or lender.
Lenders who would be happy to work with you on an auto loan for a car with a clean title might outright refuse to finance a car with a worn-out title. So try looking for local credit unions and smaller neighborhood banks that might be willing to fund loans for cars with worn-out titles – especially if you already have a relationship with them. Even beyond financing, there are many caveats to consider if you're thinking of buying a car with residual value.
What is a salvage car?
If a car is involved in a serious accident, an insurance company may declare the car a total loss. Normally, a damaged car is considered a total loss if the cost of repairing the car equals a certain percentage of the car's value before the accident.
Some states set what's called a total loss threshold, which is a specific number above which the vehicle must be declared a total loss. Let's assume the total loss threshold in your state is 70%. That is, if repairing a damaged car would cost more than 70% of its pre-accident value, it must be reported as a total loss.
If a car is deemed a total loss, it will receive a salvage title. Many salvage titles are sold at auction – and you may think that an auction is a good place to snag a cheap vehicle. But salvage cars are not drivable until they are repaired.
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A car with salvage title that has been repaired, inspected by the state and declared legal to drive again will receive a rebuilt title. Remember, if you buy a junk car, you probably can't legally drive or insure it until it gets a rebuilt title.
Should you buy a salvage title?
There are many reasons why a car may be declared a total loss: It may have been involved in an accident or damaged by a flood, it may even have been stolen and lost all valuable parts. If you're considering buying and repairing a car with salvage value, it's important to remember that not all damage to the car is visible. If you are not a mechanic yourself, you should consult a professional for advice on what work is needed on the car and how much effort is required to make it drivable again.
If you're considering buying a car with a rebuilt title, d.h. one that has already been approved by the state as roadworthy, you should still have the car appraised by a mechanic. Just because it's been approved for the road doesn't mean the car won't have problems.
And getting insurance for a car with a rebuilt title will be difficult, too – car insurance companies deal in risk, and a car with a rebuilt title because it already had major damage will send a red flag to car insurance companies.
Some auto insurers simply won't issue a policy for a car with rebuilt title, while others will offer limited coverage or coverage at higher rates. Most insurers that cover a car with a rebuilt title do not offer collision or comprehensive coverage. Instead, limited policies may only include liability insurance, which is required in most states and protects you from the financial burden if you cause property damage or injure someone with your vehicle. If you're considering buying a car with a rebuilt title, contact your current car insurance company and find out if they issue a policy for a rebuilt title before you take the plunge.
Learn more about how to get auto insurance for a car with a salvage or rebuilt title.
Getting a loan for a car with salvage or rebuilt title
As we mentioned above, it can be difficult to get an auto loan for a car with a salvage or rebuilt title. Many major banks do not offer financing for a salvage or rebuilt title. When you take out a car loan, the lender agrees to split a share of the vehicle with you until you pay off the loan in full.
Many lenders may not be willing to take the risk with a car with salvage value or rebuilt title. Your best bet is probably a smaller bank or local credit union, especially if you already have a relationship with such an institution. If they loan for rebuilt title cars on a case-by-case basis, you have a better chance of making your case if you have an established relationship, or a stellar credit score.
If you can't find a car loan for a salvage or rebuilt title car, another option is to take out a personal loan to finance your purchase. Unlike car loans, personal loans are unsecured, meaning your car does not serve as collateral for the loan. For this reason, personal loans have much higher interest rates than car loans and will cost you more over the life of the loan.
Buying a crashed car or a converted vehicle can be a good way to get a second car, especially if you do not mind having a project. But if you would need to take out a personal loan to get one, or if you are not sure you can afford necessary repairs, you should carefully consider whether this is the best move for you.
Damaging your car does not exempt you from repaying your car loan.