"The boys will able to fix the problem tonight and we'll come out tomorrow to try and show a lot more competitive times which I know we can do.
"Tomorrow's another day, and we're looking forward to it."
Paddon's teammates Dani Sordo and Thierry Neuville are in fourth and fifth places respectively, and are involved in a tight battle as they both look to secure top-five finishes and vital WRC manufacturer's points.
The team's fourth driver, Kevin Abbring, continues to benefit from valuable learning and is also hoping for a top-10 finish.
Sebastien Ogier leads Volkswagen teammate Jari-Matti Latvala by 33.8 seconds.
Ogier, the two-time defending world champion, began the day 9.5 seconds ahead of his Finnish teammate but he won the first 45.61km Panzerplatte stage on tracks normally used for tank training, as well as the two sprints beforehand, to go 18.5 seconds clear.
The Frenchman finished the second long Panzerplatte stage 15.3 seconds ahead of Latvala and claimed nine of the day's stages to his teammate's three.
With four stages remaining today, Ogier - who has five victories this season - is aiming for his second Rally of Germany victory after winning in 2011.
Another Volkswagen driver, Andreas Mikkelsen of Norway, was 1 minute, 47.5 seconds behind in third position.