Credit challenged consumers may find that there are certain situations where gap insurance makes sense when financing a car with a bad credit auto loan
Educating consumers
At AutoNet Financial, we are in the business of helping our customers reestablish their credit by filling out a credit application and financing either a new or a newer pre-owned vehicle with bad credit automotive financing through high risk lenders. In the process, we have helped many of our customers raise their credit scores and reestablish their auto credit by financing a vehicle with a bad credit auto loan. We also do our best to educate these consumers on the bad credit car loan process as well as the different types of lenders that are involved with these types of transactions.
One of the keys to a successful bad credit car loan is an understanding of how the bad credit automotive financing process is affected by the different types of products offered by the dealer F&I department. In this case, it means understanding both the pros and cons of gap insurance.
Different finance products
You’ve just made a deal for a new vehicle and there’s a very good chance you’ll be spending a lot of your hard-earned money every month paying off the loan. Once you’ve made the decision about which vehicle you want, the finance manager then presents you with a number of products you can purchase by “rolling” the cost into the price of the new car. About this time, you may be asking yourself, “Why should I increase my car payment by $15 – $20 or more a month for any of these things?”
That’s a very good question because we know what you’re going through. Every day we hear from customers that are confused about this portion of the bad credit car loan process. But we’re here to tell you that there are a number of things to think about when you buy a car and you have bad credit.
First the good news. There are a number of products out there that are so unnecessary that you don’t even have to consider buying them. Window etching, paint protection and rust proofing are three things that you can ignore. The first two, if you really must have them, can be done for a fraction of the cost by visiting an auto parts store and buying the do-it-yourself kits. As for the third, rust proofing, new car designs combined with the use of galvanized steel in car bodies and 100,000 mile rust perforation warranties from the factory have virtually eliminated the need for this product on modern cars.
There is, however, at least one product that you should seriously consider – especially if your down payment was low, your loan term is longer than 36 months, or the make and model vehicle you’re buying loses its value more quickly than the average car.
Full coverage insurance
Until you make your last payment, your car really belongs to the first secured party listed on the title. If you are financing your vehicle with a bad credit car loan, this means your car belongs to the bank or loan company listed on the loan contract.
The lender will also require that you have full coverage insurance on this car as long as it’s being financed. This means that if you get into an accident before your vehicle is paid off, this “full coverage” insurance will pay for any damages to the vehicle, less your deductible.
It also means that if you are involved in an accident severe enough that your car is declared a total loss, the insurance company pay a settlement based on either its retail value at the time of the accident, or its retail value less the deductible amount, depending on your insurance coverage (more on this, later).
The total loss scenario may not seem like a big deal, but it could be. Here’s why:
Let’s say you buy a car for $17,000 before taxes. You put 10% down and begin monthly payments of $350 dollars. Three months later you get into an accident and the car is declared a total loss. The insurance company does some calculations and issues a check for $13,500 (the current retail value of your car – considering that it is used and has 4,000 miles on the odometer). Unfortunately, you still owe the bank almost $16,000. In order to satisfy the requirements of the loan, you’ll need to continue to make payments until the loan balance of $2,500 is completely paid off.
Admittedly, this is a worst case scenario. But it could happen, to a greater or lesser degree, to a fairly high percentage of car loans, whether they’re bad credit car loans or not. Here is why:
Most vehicles lose between 10% and 20% of their value as soon as you drive them off the lot. At the end of the first year of ownership, many cars depreciate as much as 30%. This means that, depending on the down payment and the loan term, a high percentage of car buyers find themselves “upside down” in a car loan anywhere from the first two years to the first four years of the loan. That’s a long time in which to be exposed to a “gap” of potentially thousands of dollars in negative equity.
Gap insurance
But there is hope and here is where the gap insurance product comes into play: If you have gap insurance, the insurance company will guarantee to pay the difference between what your car insurance company settles on and the balance of your car loan (less your deductible – although if you weren’t at fault, there are many states in which your insurance company will waive the deductible altogether in this situation).
There are many who would argue that gap insurance is just a waste of money and, in some cases, they’re right. If you have a short-term loan (36 months or less) you will be in an equity situation with your car in a very short time. Also, if your down payment was 20% or more, chances are very good that you will also be in an equity position for all or most of the loan – especially if it is for 60 months or less.
But aside from the above situations, for most people gap protection really makes a great deal of financial sense. It makes so much sense, in fact, that most captive leasing companies (those lending companies owned by the auto manufacturers) include gap insurance as part of the lease agreement, in large part to protect themselves against losses (most lessees are “upside down” in a lease until the very end of the contract).
The Bottom Line
In many cases, by opting for gap insurance, you could avoid paying thousands of dollars to the bank for a vehicle you no longer have. You can also avoid the possibility of defaulting on your loan if this kind of situation would result in an inability to pay the remaining balance that you owe on the finance contract.
At Auto Net Financial we have helped thousands of people with bad, blemished, bruised and tarnished credit buy cars and reestablish their credit at the same time. Our nationwide network of affiliate dealers specializes in bad credit car loans. Out web site will help you determine how much car you can afford and unlike many other companies, our toll free number is listed on our site in case you have any additional questions. When you decide to buy a car, our online bad credit car loan application can be filled out in the comfort and security of your own home.
For more information, visit www.autonetfinancial.com to see what we can do for you.
