Consumer Car Buying Advice Blog

It may seem like a waste of money but there are certain situations where gap insurance makes sense when financing your vehicle with a bad credit car loan

Shifting gears

If you’re reading this, you may be one of a large number of consumers who find themselves in the position of having to finance their next car with a bad credit auto loan. As part of our business at Auto Credit Express, we have helped thousands of our applicants raise their credit scores and reestablish their car credit by filling out our online bad credit auto loan application and financing a vehicle with car loans with bad credit through one of our affiliate dealers. By paying off the loan in a timely manner, these buyers have a good chance of starting a new chapter in their lives.

The alternative, buying a vehicle from a tote the note car dealer, can be a problem because these dealers don’t report payments to any of the credit bureaus. On the other hand, taking out a loan with a bad credit lender and choosing a vehicle that’s too expensive can also create problems since this can stretch your budget and even result in repossession.

As with anything else, the key to successfully rebuilding your credit with one of these subprime loans means focusing on the process. In this case, it has to do with understanding both the pros and cons of a number of dealer backend products such as gap insurance.

Additional loan products

Picture this in your mind: You’ve just finished making the 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 and settled on a price with the salesman, you’re walked into the finance manager’s office where you’re presented with a number of products you can purchase by “rolling” their cost 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?”

That’s a very good question and we know exactly what you’re going through. Every day we hear from customers that are confused about 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, here’s the good news: There are a number of “backend” 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 find them necessary, 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 design techniques 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. We’re talking about gap insurance.

Gap insurance

Until you make the last payment, your vehicle 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.

If you get into an accident before your vehicle is paid off – beginning at the time you first drive it off the car lot – your “full coverage” auto 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 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 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 of $2,500 (plus interest) 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 cars 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 vehicles 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 the “gap” of potentially thousands of dollars in negative equity.

But there is something that can be done about this 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).

When it makes sense

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, a case can be made for requesting gap insurance. 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

In many cases, with just a small increase in your monthly payment, you can avoid the chance that you might have to pay 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 cars and reestablish their auto 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 many 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, auto insurance, bad credit, car credit, credit, credit score, credit scores, gap, gap insurance, negative equity, repossession, subprime, tote the note, upside down

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