Bad Credit Car Loans and Gap Insurance

Additional products

You’ve just made a deal for a new car and, chances are, you’ll be spending a lot of your hard-earned money every month paying off the loan. Once you’ve made the decision about which vehicle you want, the finance manager then presents you with a number of products you can purchase and “roll” into the price of the new car. About this time, you’re probably asking yourself, “Why should I increase my car payment by $10 or more a month for any of these things?

Bad credit car loans

Here at Auto Credit Express, we know what you’re going through. Every day, we hear from customers that are confused about the subprime car loan process. But we’re here to tell you that there are a number of things to think about when you buy a car and you have bad credit.

First, here’s the good news. There are a number of products out there that are totally unnecessary. Window etching, paint protection and rust proofing are three things that you can ignore. The first two, if you really must have them, can be done for a fraction of the cost by visiting an auto parts store and buying the do-it-yourself kits. In the case of rust proofing, new car designs combined with galvanized steel and 100,000 mile rust perforation warranties from the factory have virtually eliminated the need for this product.

There is, however, at least one product that you should seriously consider – especially if your down payment was low, your loan term is long (over 36 months) and the type of vehicle you’re driving has a tendency to depreciate more quickly than the average car.

Gap insurance

Until you make your last payment, your car really belongs to the first secured party listed on the title. If you are financing your vehicle with a bad credit car loan, this means your car belongs to the bank or loan company you make your payments to.

If you get into an accident before your vehicle is paid off – beginning the day you drive your car off the lot, your “full coverage” car insurance will pay for the damage, less your deductible. But if you are involved in an accident severe enough that your car is declared a total loss, the insurance company will settle for the retail value of your car less the deductible.

The second scenario may not seem like a big deal, but it could be. Here’s why:

Let’s say you buy a car for $17,000 before taxes. You put 10% down and begin monthly payments of $350 dollars. Three months later you get into an accident and the car is a total loss. The insurance company does some calculations and issues a check for $13,500 (the current retail value of your car – considering that it is used and it currently has 4,000 miles on the odometer). Unfortunately, you still owe the bank almost $16,000. In order to satisfy the requirements of the loan, you need to continue to make payments until the loan is paid off.

Admittedly, this is a worst case scenario. But it could happen, to a greater or lesser degree, to a fairly high percentage of car loans, whether they’re bad credit car loans or not.

Remember, most vehicles lose between 10% and 20% of their value as soon as you drive them off the lot. But there is hope and here is where gap insurance comes into play. If you have gap insurance, the gap insurance company will pay the difference between what your car insurance company paid and the balance of your car loan (less your deductible – although if you weren’t at fault, there are many states in which your insurance company will waive the deductible altogether in this kind of situation)

One more reason

There are many who would argue that Gap insurance is just a waste of money and, in many cases, they’re right. If you have a short-term loan (36 months or less) you will be in an equity situation with your car 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 – especially if it is for 60 months or less.

But for everyone else, gap protection can really make sense. It makes so much sense, in fact, that most captive leasing companies (those lending companies owned by the auto manufacturers) include gap insurance as part of the lease agreement – in large part to protect themselves against losses (remember, leases are based on the assumption that a vehicle’s depreciation will only catch up with what is owed on the contract at the very end of the lease).

The Bottom Line

So you can see that, in many cases, with just a small increase in your monthly payment, you can avoid paying thousands of dollars to the bank for a vehicle you no longer have. You can also avoid the possibility of defaulting on your loan if this kind of situation would result in an inability to pay the remaining balance that you owe.

For more information on bad credit car loans, visit our website at www.autocreditexpress.com. Here you will find auto loan calculators as well as answers to frequently asked questions about bad credit car loans. You can also fill out a loan application in the privacy of your home and get a quick answer from one of our participating dealers and get you back “on the road” to re-establishing your credit.