Consumer Car Buying Advice Blog

Consumers with bad credit may find that there are certain situations where gap insurance makes sense when financing a car with a bad credit car loan

Avoiding repossession

During the last 20 years at Auto Credit Express we’ve worked with consumers who have bad credit and have helped many of these people raise their FICO scores and reestablish their auto credit by filling out our online bad credit car loan application and financing a vehicle with a second chance auto loan through one of our affiliate dealers. Along the way, as we’re doing now, we try to provide our applicants with the information they need in order to make educated decisions about the kind of loan they should choose (such as a tote the note loan versus a bad credit car loan). A bad decision at this time could result in a loan they can’t afford which could turn into in a repossession that could lower their credit scores even further.

As with anything else, the key to successfully rebuilding your credit means focusing on the basics. In this case, it means understanding both the pros and cons of dealer back end products such as gap insurance.

Loan products

You’ve just made a deal for a new car and, chances are, 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 and “roll” into the price of the new car. About this time, you’re probably asking yourself, “Why should I increase my car payment by $15 – $20 or more a month for any of these things?”

First, here’s the good news. There are a number of products out there that are totally unnecessary. 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. In the case of rust proofing, new car designs combined with galvanized steel 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, and the make and model vehicle you’re buying loses its value more quickly than the average car.

Gap 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 you make your payments to.

If you get into an accident before your vehicle is paid off – beginning when you drive off the car lot – your “full coverage” car insurance will pay for the damage, less your deductible.

But if you are involved in an accident severe enough that your car is declared a total loss, the insurance company will settle either for 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 second 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 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 it currently 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 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 a loan. That’s a long time in which to be exposed to a “gap” of potentially thousands of dollars in negative equity.

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).

Leasing companies aren’t stupid

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 for everyone else, gap protection really makes 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 (remember, leases are based on the assumption that a vehicle’s depreciation will only catch up with what is owed on the contract at the very end of the lease).

As we see it

As you can see, in many cases, with just a small increase in your monthly payment, you can 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.

At Auto Credit Express we have helped literally thousands of people with bad, blemished, bruised and tarnished credit buy a car and reestablish their credit at the same time. Our nationwide network of affiliate dealers specializes in bad credit car loans. Our web site, www.autocreditexpress.com, will help you determine how much car you can afford and unlike other sites, our toll free number is listed on every page in case you have any additional questions.

So why not begin the process right now by filling out our secure online bad credit car loan application to see what we can do for you.

Tags: auto credit, bad credit, bad credit auto loan, bad credit car loan, Car Insurance, car loan, car loans, credit, credit score, fico, FICO score, gap insurance, negative equity, repossession, second chance car loans, tote the note

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