For bad credit borrowers, GAP insurance can be useful as a way to protect you and your wallet. We cover how GAP insurance coverage works, and when to consider purchasing it.
Bad Credit Car Loans
It’s no secret that bad credit borrowers often get assigned higher than average interest rates on their auto loans. Because of a higher interest rate, it means more interest charges that accrue over the course of the loan. This can lead to owing more on the car than it’s actually worth, called having negative equity. Negative equity can give you some trouble down the line if something happens to the vehicle while you still owe on it.
If you were to get into an accident with your car, and the vehicle was deemed a total loss, or “totaled,” the insurance company would research the market value of it. Once the market value of your car is established, you’re sent a check for that amount.
But what if you owe more on the vehicle than what it’s selling for on the market? Bad news – you still owe the lender that negative equity balance. You either have to pay for it out of pocket all at once, or you might be able to continue to make payments on the loan. This isn’t a great situation, as you’re now paying on a car that you can’t even drive anymore.
This is where GAP insurance can help. GAP insurance stands for “guaranteed asset protection.” It covers the GAP between vehicle value and loan amount and pays for the entire balance of your loan in the event of an accident or if your car is stolen, no matter what your vehicle’s market value is.
How Do I Buy GAP Insurance?
New cars lose a lot of value within the first year of ownership, typically around 20%. And if you qualified for a higher interest rate due to your low credit score, that high interest rate combined with steep deprecation could have you stuck in negative equity for a while. For this reason, GAP insurance is available on new or leased vehicles.
GAP insurance is optional coverage, so you’re not required to purchase it. However, you are required to purchase full coverage auto insurance, which you must maintain while you’re financing a car. The average price of GAP insurance varies, but it’s typically around $20 to $40 a year, so it’s usually pretty cheap! The selling price of your vehicle also plays into the overall cost of the coverage.
As far as where you can get GAP insurance, your current auto insurance company likely offers it, and dealership finance managers often sell it, too. If you finance your car from a dealer, the finance manager usually offers you the option to buy GAP insurance while you’re completing the final paperwork on your next vehicle.
You also don’t have to buy GAP insurance immediately after you get the car. However, you shouldn’t wait too long to purchase it, since insurers have different stipulations on when you can get it after the purchase date of the vehicle.
Ready to Car Shop?
Financing a car is more than just your monthly payment. When you’re looking at vehicles, it’s also important to shop for auto insurance and consider optional coverages.
However, with bad credit, it can be difficult to get in touch with a lender that can work with your unique credit situation. Why start not right here at Auto Credit Express?
We’ve already done the legwork of creating a nationwide network of dealerships that are signed up with bad credit lenders, and we want to find one near you. Begin by filling out our free car loan request form and we’ll get right to work for you.