How Your Car Loan Is Affected If You Bought a Lemon

Lemon Laws and Car Loans

Broken Down Car

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Automobiles are complicated products, especially the ones built today. Some estimates put the average number of parts in a car at around 30,000. Given that level of complexity, it’s nothing short of amazing that most new cars roll off the assembly line so consistently trouble-free. And if you do find a problem with a new car, a quick trip back to the dealership is typically all you need to do to make it right.

But every once in a while there’s a problem that simply won’t go away, even after several visits to the shop. Let’s hope you never find yourself in that situation, but if you do, you may be able to return your vehicle to the dealer for a full refund thanks to federal and state lemon laws. It sounds simple enough, doesn’t it?

Still, as is often the case, things aren’t always quite so easy. For example, what if you have taken out a loan on your car and it turns out to be a lemon? How will your car loan be affected? The answer to that question is not nearly as complicated as an automobile itself, but it does require a bit of explanation.

What Is a “Lemon Law”?

The term lemon, in addition to being a popular citrus fruit, also has a darker meaning: it is used to describe a vehicle that has severe defects that might impact how safe it is to drive or how well it runs. Thankfully, we have laws to protect citizens against such vehicles.

Lemon laws are designed to compensate purchasers 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 option.

Remember, each state has its own lemon laws and each varies in its details, requirements, and remedies. There are also time and mileage limits, so make sure to check out your state’s law as soon as you believe you may have a lemon.

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. It’s not a bad idea to ask about how your financial institution handles such situations before you sign on the dotted line, either.


If you choose repurchase as your remedy, the amount of your refund will include 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. Also included are the interest payments that you made on your loan. 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 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, you will be obligated to pay your lender the difference.


If you choose to have the manufacturer replace your vehicle, the new vehicle must be identical or relatively equivalent to the one it is replacing—except that it won’t be a lemon, of course. You will be obligated to pay the manufacturer for any “offset of use” costs (as described above).

As for your loan, it is important to know how your lender will handle any agreement on the new vehicle. You may be required to come to all new (and possibly very different) terms, interest rates, monthly costs, etc. So make sure you contact your lender and work out all of the details before you choose a replacement as your remedy option.

Don’t let any of the above information scare you away from making a lemon law claim. If you honestly believe that you are entitled to compensation, then go for it. No one should have to keep fighting to fix a car that was broken from the start, and no one should sacrifice safety by bringing such a car on the road. Just make sure to stay informed of your rights and obligations all along the way.