When you're financing a car, you're required to have full coverage auto insurance. But full coverage doesn't always mean insurance covers the total cost when something happens to your vehicle. There can be holes in your coverage between what your insurance pays for, and what you owe to a lender. But there doesn't have to be, and this is where guaranteed asset protection (GAP) insurance coverage comes in.
Covering the Coverage Gap
With full coverage insurance, if something happens to your vehicle, the insurance company only pays for the current actual cash value of your car. If you have negative equity, where you owe more on your loan than the vehicle is worth, you're going to be left holding the bill for a car you're no longer able to drive.
GAP insurance covers the difference between your vehicle's value at the time of an accident or theft, and the amount you owe to your lender. GAP insurance is a form of supplemental coverage that's often offered to you when you're purchasing a car, especially if it's a new vehicle.
Though it's typically offered by the finance manager at a dealership as an additional product when you're setting up your auto loan, you can usually get GAP coverage through your insurance company at any time. However, if you set up GAP insurance with the dealer, it's most likely rolled into your loan and you won't have to worry about remembering to make the extra payment each month.
GAP Insurance Is Good for Bad Credit Borrowers
As a bad credit borrower who's already struggling with credit, the last thing you want to do is leave yourself open to more debt. This is just one reason it's a good idea to get GAP coverage while you owe more on your loan than your car is worth. You can usually cancel the policy once there's equity in your vehicle.
Because cars depreciate, or lose value over time, it's a good idea to have the extra coverage provided by a guaranteed asset protection policy. Here are four reasons you may need GAP coverage on your vehicle:
- You made the minimum down payment – There's nothing wrong with only making the minimum down payment your lender requires when you finance a vehicle. However, a bigger down payment can help you to close the gap between your loan balance and your car's value. Plus, a significant down payment cuts down on how much you borrow, and helps you save money overall because it lowers the interest charges.
- You chose a long loan term – Longer loan terms are becoming increasingly popular as vehicle prices continue to rise. These long loan terms aren't always a good idea though, especially if you have poor credit, because they mean a higher overall cost due to the increased interest charges. If you took out a long loan, such as a 72- or 84-month term, having GAP can protect you, since you're likely to have negative equity for a longer period of time compared to a shorter loan.
- You rolled over the negative equity from your last loan – When you're caught with negative equity when you trade in a car, lenders sometimes allow you to roll it into your next loan, instead of paying off your old loan. This might seem like a great deal at first, but it only increases the cost of your new loan and leads to even more negative equity on your new loan.
- Your vehicle is losing value fast – Cars depreciate over time from normal driving, but did you know that you can actually contribute to your vehicle depreciating faster than normal? It's true. Items like excessive mileage, failing to keep up with maintenance, or wear and tear can decrease the value of your car more quickly. Another thing that can speed up depreciation is falling used vehicle prices, like you might see in an economic crisis. Having GAP is a good way to protect yourself if your car isn’t holding its value as you expected.
Get GAP With Your Next Car
Now that you know it's important to have guaranteed asset protection, you should consider adding it the next time you finance a vehicle. If you're looking to take out an auto loan right now, Auto Credit Express wants to help.
We're teamed up with a network of special finance dealerships all across the country that have the lenders available to work with people in many types of credit situations. Don't wait until it's too late, start your next car buying journey now with our help. Simply fill out our easy, fast, and free auto loan request form and we'll get to work connecting you with a dealer in your area.