Having Gap insurance can mean the difference between owing a lender thousands of dollars and paying off the entire loan balance
At Auto Credit Express we believe that people with bad credit should limit the term of a car loan to 48 to 60 months. That's because subprime loans not only come with higher interest rates, shorter loans also reduce the time a vehicle is worth less than the loan balance - a situation called "negative equity."
But with more lenders offering longer loan terms to keep monthly payments affordable and more borrowers choosing longer loans, there's also the chance these consumers could owe lenders thousands of dollars if their car is declared a total loss.
The reason for this is that if a vehicle is declared a total loss due to an accident, theft or even flood damage, an insurance company is only obligated to pay its current value, not what's owed on the finance contract.
Fortunately, there's an affordable solution and it's called gap insurance.
Gap insurance covers the "gap" between the actual value of a vehicle and what's owed to the lender. It can be purchased from a car dealer at the time of delivery with the cost added to the monthly payment or, if the buyer's auto insurance offers it, the cost can be added to their car insurance.
Advantages and disadvantages
Both choices come with advantages and disadvantages when it comes to Gap insurance.
Dealer-Purchased Gap Insurance:
Advantages: The cost is included with your monthly car payment. In most cases these policies pay the entire difference between the value of the vehicle and what is owed on the contract including any deductibles the policy might contain.
Disadvantages: Buying gap coverage from a dealer is usually more expensive than buying it from an auto insurer. If it's added to the loan, borrowers will pay interest on the premium cost. While coverage typically can be cancelled at any time, borrowers will a refund check of the unused premium and the monthly car payment will remain the same.
Auto insurance gap coverage:
Advantages: Buying gap coverage from an auto insurer is usually less expensive than buying it through a dealer. Since the cost is added to the car insurance policy, other than a small monthly carrying charge added by most insurers (as opposed to paying for the entire cost of a yearly policy up front) there is no interest expense involved. Coverage can be cancelled, and later reinstated, at any time.
Disadvantages: In most instances, deductible rules also apply to gap coverage. This means that if the borrower is at fault, the payout will not include the deductible amount – which must come out of the borrower's pocket.
The Bottom Line
In most cases, gap insurance can save borrowers a lot of grief – and money - when the finance term is over 48 months and when the down payment is less than 20 percent. Smart borrowers – especially those with credit issues on tight budgets – then need to decide if they want to purchase it through a dealer or their auto insurance company.
One more tip: Auto Credit Express specializes in helping credit-challenged consumers find those dealers that can give them their best opportunities for car loan approvals.
So if you're ready to reestablish your car credit, you can begin now by filling out our online auto loan application.