When you buy a new or used car with a bad credit auto loan you may also be asked if you are interested in a number of additional products such as rust proofing, window etching and gap insurance.
The good and the bad
Here at AutoNet Financial, we are often asked by customers if any of the additional “products” offered by car dealers – specifically in the sales pitch that’s usually made in the finance office - makes financial sense.
Well, here goes: while window etching, rust proofing and paint protection are almost unnecessary given the way cars are built today (manufacturer original equipment alarm systems and galvanized steel come immediately to mind) gap insurance, especially for cash-strapped bad credit car loan buyers, can avert a potential financial disaster.
Gap insurance
Gap insurance is just what the name implies. It covers the difference (the gap) between what you owe on the car at any point in time and what it happens to be worth at that same point (as a result of vehicle depreciation).
A case in point (worst case scenario): You purchase a car for $17,000 (before taxes). The down payment is 10% and you begin making monthly payments of $350. Three months later you’re involved in an accident and the car is declared a total loss.
The insurance company does some calculations based upon current market conditions and issues a check to the lender (the secured interest in the loan) for $13,500 – the current market value of the vehicle (most new cars typically lose 15% to 20% of their value as soon as you drive them off the lot).
Unfortunately, you still owe the bank almost $16,000 on the loan and in order to satisfy the contract requirements, you will need to continue making payments until the loan is paid off.
Here is where gap insurance comes into play. If you had purchased the optional gap insurance at the time you took out the loan, the policy would’ve paid the difference between what your car insurance company paid out and the balance due on your car loan (possibly minus a deductible amount, depending on the stipulations of your vehicle insurance policy).
The Bottom Line
Gap insurance is not always necessary – especially if your down payment is large (20% or more) and/or your loan term is fairly short (36 months or less). But for those bad credit car loan customers who don’t fall within those guidelines, a small increase in the monthly payment can mean the difference between owing nothing and owing hundreds or even thousands of dollars to a lender for a vehicle you no longer have.
For more information on bad credit car loans, visit our website at www.autonetfinancial.com.
