When signing the paperwork for a new or used car, your salesman will present a product called gap insurance. Before you dismiss this option, you should know what it is and why you might need it. Gap insurance is actually a debt cancellation agreement, and stands for 'Guaranteed Auto Protection'. This insurance covers the difference between what your car is actually worth and what you still owe on the loan; to pay the “gap” in case of an accident that totals the vehicle, or if it is stolen.
Why You Need Gap Insurance
There are four factors where it makes sense for you to purchase gap insurance.
- If you have a little, or no down payment. A down payment is critical to offset depreciation. New cars typically depreciate 20% in value during the first year of ownership, while a used vehicle may lose 10%. This quickly leads to something called being 'underwater', or owing more than the car is worth.
- If you have taken out a long loan term. With car costs rising and income levels remaining stagnant, more people are taking on loans with terms longer than 60 months to be able to afford a vehicle and the monthly payments. This also leads to being underwater on your loan, because the first couple of years are typically spent paying more interest and less principle on the loan.
- If you are a high mileage driver or the car has a history of depreciation. Anything leading to a quicker than average decline in the cars value is harmful to your wallet.
- If you are financing anything other than the car. This can include rolling a loan from a previous vehicle into your current loan, or adding tax, title and fees into your loan.
There are very few people that prepare themselves for the worst case scenario. If your car is totaled or stolen and you still owe $18,000 when it's valued at $14,500, you will be faced with a $3,500 loan balance on a vehicle you can no longer drive. Gap insurance will cover that difference, is relatively inexpensive, and can be added at any point. It is usually more reasonable to get this coverage through your regular insurance provider, and unlike purchasing it through a dealership, you can drop it when you have built equity into the car.
How We Help
When you are ready to purchase your new car and have less than perfect credit, Drivers Lane can help, possibly with a loan requiring little or no down payment. We understand the many complexities that you face when purchasing a car, and we can help you after you fill out our quick and secure application.