GAP insurance is common, optional insurance coverage that many new-car buyers utilize. But if you’re a bad credit borrower, GAP insurance can help you, too, even if you don’t finance a brand new vehicle.
The Cost of Bad Credit In Vehicle Financing
If you have poor credit, you may not be surprised to learn that it can cost you a little more to finance a car than a good credit borrower. This doesn’t mean that dealers raise their vehicle prices for bad credit borrowers – we’re talking about interest charges.
Your credit score is typically the most important factor in what interest rates you can qualify for. If a bad credit borrower and a good credit borrower bought the same car at the same price, it’s very likely that the bad credit borrower pays more throughout the loan term just due to interest charges.
Since your interest charges can make it tough to pay down your loan quickly, negative equity is a real risk. Negative equity is when you owe more on the car than it’s worth. It can happen if your car loses value faster than you can pay down your loan.
If you were to get into an accident or someone steals your vehicle while your car’s in a negative equity position, it can create a big problem for you. Full coverage auto insurance typically only pays out what your car’s value is at the time of the incident. If your vehicle were to be totaled in an accident, this could mean still owing money your auto lender if the car had negative equity, even if it’s wrecked and/or undrivable.
This is exactly why GAP insurance can be helpful for those that take on bad credit auto loans. GAP, or guaranteed asset protection, literally covers the “gap” between your vehicle’s value and your loan balance. If you’re getting a bad credit car loan and want to protect your wallet, then it may be worth considering.
How GAP Insurance Can Help
If your car is stolen and never recovered or totaled in an accident, and you have full coverage and GAP insurance at the time, it’s very likely you don’t need to pay anything extra out of pocket (aside from your deductible if you have one). The full coverage steps in to cover the car’s value, and GAP insurance can pay for the remaining loan balance.
Here’s an example:
Bob has a truck that was recently totaled and deemed unsafe to drive, and was estimated to be worth $15,000 at the time of the accident. He owes $19,000 on his loan. Bob has GAP insurance and full coverage. The full coverage was able to pay the $15,000, and the GAP insurance paid the remaining $4,000 to Bob’s lender, successfully paying off the truck’s loan.
If Bob is in this same situation without GAP, the vehicle still gets paid off by the insurance company, but Bob still owes the lender $4,000 out-of-pocket.
If you're like Bob and have negative equity, but don't have GAP insurance, you would still owe the lender the amount you're underwater even though the vehicle is deemed unsafe to drive. When a vehicle is totaled or stolen, you still must pay the lender what you owe to end the loan contract.
How Much Does GAP Insurance Cost?
Typically, GAP insurance costs around $20 to $40 per year. Yes, you read that right, for the whole year. GAP insurance is rather inexpensive. Often, the cost can be added to your insurance premium or your monthly car payment. If you get a policy that's $40 a year, you're only paying $3.33 dollars a month for this extra protection.
Many insurance companies offer this optional coverage, and it’s usually available for you to purchase at the dealership while finishing up your paperwork with the finance and insurance manager. Auto lenders sometimes offer their own GAP insurance coverage options.
Usually, GAP insurance has to be purchased soon after you finance your vehicle, or within a certain time frame. Additionally, most insurers prefer to cover brand new cars, or used cars in good condition.
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Compare $20 to $40 a year to having to pay $4,000 out of pocket like in the example above. GAP insurance could save you a lot of headache, money, and avoid the whole situation of having to pay on a vehicle you no longer can drive.
For many bad credit borrowers that are expecting a high interest rate on their loan, GAP insurance can offer some peace of mind. It’s pretty cheap and many insurance companies offer this coverage. However, when you have bad credit, finding auto insurance isn’t usually the toughest part of the car-buying process – it’s finding a lender that’s able to work with your credit situation. We want to help with that at Auto Credit Express!
We’ve created a nationwide network of dealerships over the last two decades, and we want to look for a dealer in your local area that’s willing to assist bad credit borrowers. Get started on your path to a bad credit car loan by completing our free auto loan request form.