Jared from Chicago writes, "Should I buy gap insurance on my next vehicle?"
Well Jared, there are instances when gap insurance makes sense for approved auto loans, but it's important to first understand the advantages and disadvantages of gap insurance.
Until the last loan payment, your car really belongs to the lender. This means that if you get into an accident before it's paid off, your full coverage insurance will pay for any damage, less your deductible. It also means that if you're involved in an accident where the car is declared a total loss, the insurance company will pay its retail value (possibly less the deductible) at the time of the accident.
The problem is, if you're early enough into a loan with a small down payment, your vehicle could be worth thousands of dollars less than the loan payoff. If this happens, you'll need to continue to make payments until the remaining balance is paid in full. Although this is a worst case scenario, it can and has happened.
This is where gap insurance pays off; If you have it, the gap insurance company will pay the difference between the amount your auto insurance pays and the balance of your car loan, less any deductible. If you weren't at fault, in many states the insurance company will waive that amount.
Here's a situation where gap insurance would be a waste of money; if you have a short-term loan of 36 months or less, you will be in an equity situation with your car loan 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, and will not need gap insurance.
But in just about every other situation, it can make sense to buy it. The small increase in your monthly payment may save you from having to pay thousands of dollars to a lender for a vehicle that's been damaged beyond repair. You can also avoid defaulting on a loan if this situation would result in your inability to pay the remaining balance.
At Auto Credit Express, we specialize in placing customers with bad credit with dealers that can help them. These dealers are knowledgeable and will give you your best chance at getting approved for a second chance auto loan. Visit us at AutoCreditExpressVideo.com to find out how we can help.