The Benefits Of Gap Insurance: Why You Either Need It Or Not

“Gap Insurance Doesn’t Cover Breakdowns”

Gap Insurance is sometimes often confused with extended service coverage. In other words, some people think that if they have Gap Insurance and their vehicle breaks down then the breakdown will be covered by the Gap Insurance; that is totally erroneous. Why? Because Gap Insurance doesn’t cover break downs, it covers the “Gap” between the loan amount and the actual cash value amount of a vehicle.

Let me give you an example of how Gap Insurance works: Let’s say that you’re trading your three year old car in for that brand new sparkling model that you’ve had your eyes on for the last several months. The loan amount on your trade-in is $12,000, but the car dealer gave you a trade-in amount of only $8,000 meaning you had $4,000 in negative equity.

This scenario is quite common when you trade a vehicle in that has a balance, and since you did comparison shopping you know that this was the best deal you could get. The new vehicle that you are buying has a MSRP of $23,990, but you negotiated a deal at invoice (you’re such a good negotiator) which was $21,600. Once you add your tax, title and any fees, your total balance to finance is about $27,000.

“But The Accident Wasn’t Even Your Fault”

Let’s say that six months down the road when you’ve only made 5 or 6 payments you get in an accident. You’re fine, but the vehicle is “totaled.” Your insurance company states that the replacement value of your vehicle is $16,000. Let’s say that your loan balance is now down to $26,000 which means you have a “Gap” of $10,000 between the insurance company’s replacement value and the current loan balance on the vehicle.

When you took the loan out on the new vehicle, you promised to pay (the contract you signed has “promise to pay” in the verbiage) the bank back in full. They said that upon full payment they would then send you the title to the vehicle, and release you from the lien.

“Now That My Car Is Totaled, I Guess That Means My Loan Is Satisfied…”
Not!!

Just because your vehicle was totaled doesn’t mean that your obligation to the bank is now terminated. The bad news is, you still owe the bank the balance of the loan and have a vehicle that you can’t even drive anymore. Not the kind of scenario you want, but many will face.
“Good News…Your Insurance Company Just Settled Your Loss…Bad News, It’s $10,000 Less Than The

Loan Balance Payoff On Your Loan”

Your insurance company cuts you a check for the replacement value of the vehicle for $16,000, but in order to pay the bank off you need another $10,000. Where are you going to get $10,000? And how would you feel if you had to come up with $10,000 to pay a car loan off on a vehicle that you can no longer drive? Not a good situation for anyone to have to deal with.

“Your Gap Insurance Purchase Scenario”

Now let’s say we started this example from scratch with one difference: When you purchased the vehicle, you also purchased Gap Insurance. So now when the insurance company writes you a check for the $16,000, the Gap Insurance will pay the difference between the $16,000 insurance claim check, and the $26,000 loan balance. In other words, the Gap Insurance Company will write a check to your bank for $10,000 to pay your loan off.

When you financed the vehicle six months ago, the Gap Insurance might have been around $600, but that was assuming that you would have paid the whole loan off since it was part of your payments and included in the total amount financed to the bank. Since the vehicle was totaled only six months down the road, you actual cost for the Gap Insurance was next to nothing. Not to mention that it just saved you having to come out of pocket $10,000. That could have been the smartest investment you ever made.

Do Your Need Gap Insurance?

So now the question is, “Do you need Gap Insurance?” Gap Insurance is like any insurance. You’re covering yourself from a potential catastrophic financial loss. Why do people buy life insurance? If the bread winner were to die, that would cause a catastrophic financial loss to the family in terms of living. Health insurance is no different in that if you get sick enough, the hospital bills could cause you a catastrophic financial loss.

You have to look at Gap Insurance like any other insurance which is simply, “What’s the risk?” In the above example, without the Gap Insurance your potential out of pocket loss was $10,000 (or more). With the Gap Insurance your out of pocket loss is next to nothing. Why would someone take a risk like that when the out of pocket expense for the Gap Insurance is next to nothing versus having the potential to come out of pocket a substantial amount of money that they probably don’t have?

If in the above example you put a $10,000 down payment down when you bought the vehicle, you would have only had a loan balance of $16,000 at the time of the loss. That being the case, you wouldn’t have owed the bank a dime. So do you need Gap Insurance or not? It depends on your situation. Remember, most new vehicle depreciate at least $4,000 the day you drive it off the lot.

That means if you buy a new vehicle and don’t put any money down, you’re probably at least $6,000 “Upside Down” the day you drive it home. Gap Insurance would probably make a lot of sense in that case. It boils down to what’s the risk if the vehicle is deemed a total loss either by accident or theft.

Gap Insurance Guidelines

To go by the rule of “Better to be safe than sorry” I’d try to stay around 70% LTV (Loan to Value) of amount financed at time of purchase. In other words if the loan value on a used vehicle is $10,000 or the invoice on the new vehicle is $20,000, you’d need to have a total amount financed on the used vehicle of $7,000. On the new you’d want to have an amount financed at time of delivery of about $14,000.

“Cash is King”

When it comes to trying to buy your next vehicle at a 70% LTV, the only way to accomplish that feat is to put a sizeable down payment into the deal. The problem with that is, most people don’t have a sizeable down payment to put down on their next vehicle purchase.

If you drive off the lot and have a sizeable “Gap” between what your loan balance is versus the actual value of the vehicle, and you don’t get the gap insurance, you’re taking the risk of having to come out of pocket a sizeable amount of money if your vehicle is deemed a total loss.

“Your Promise To The Bank…”

Remember, you still owe the bank the balance of the finance agreement in the event of a total loss situation on your vehicle. If the insurance companies paid claim is less than your loan balance payoff, you’re still responsible for the difference.

That in itself could be a potential way to ruin your credit as the bank will report the deficiency to the credit reporting agencies. If a outstanding loan balance deficiency shows up on your credit report, then your credit score will take a major hit not to mention the fact that you will have an awful hard time getting another car loan if you can get one at all.

“Conclusion”

Follow the above guidelines on whether to get the Gap Insurance or not. If you’re not at 70% loan value on a used vehicle or Invoice on a new vehicle, then get the Gap Insurance. It could be the smartest insurance decision you’ve ever made.

Bad Credit Car Loans: Who Are The Go To Guys?

Secondary Lending

With the recent economic down turn with people losing jobs, many have also lost their credit and or ability to qualify for an automobile loan. Everyone might have a little different scenario when it comes to being able to qualify for a car loan after a bankruptcy or a major hit on your credit report due to losing a job, but being able to qualify for a car loan will more than likely throw you into the secondary market.

The secondary market when it comes to car loans means a couple of things: First of all, it means it’s harder to qualify for a loan. Secondly it means if you do qualify, your interest rates will be higher. It also means that you will be required to have documentation on things like your income (current paycheck stub), proof of residence and a current phone bill.

Assuming that you can prove your income (W-2 status with a current paycheck stub is the best way), and you have all the other required documents getting a loan in the secondary market should be fairly easy; although there are some variables that could knock you out of getting a loan even in the secondary market.

Here’s Two Different Scenarios: Which One Are You?
Scenario #1

So let’s look at two different scenarios: Let’s say that a couple years ago life was good. You had a good paying job, a house with a mortgage, a car with a loan, and some credit cards with some balances. All a sudden, your good paying job was eliminated for one reason or another. The small savings account that you had (if you had any) will be gone in no time, and a financial hurricane is quickly moving on shore looking to obliterate your fortress.

After getting cash advances on your credit cards and then defaulting on them to try and keep your home, it’s only a matter of time until you lose everything. Your only option at this point is to declare a chapter 7 Bankruptcy to wipe the slate clean so you’ll have a new start.

Assuming that you lost everything (cars, house, and credit cards), your position of being able to get a car loan right now is slim to nil. Also assuming that your bankruptcy has been discharged (if you’re still in a bankruptcy it’s almost impossible to get a car loan).

Scenario #2

Scenario #2 is pretty much like the first one with one exception…You lost everything except you were able to either file a bankruptcy and keep your vehicle meaning all your other credit is shot, but your vehicle wasn’t repossessed. Or maybe you were able to pay your car loan off before the shit hit the fan, and or you didn’t have a car loan at the time of your bankruptcy.

If your credit score was above 700 before you lost everything, it will probably be in the low 500 range, but if you didn’t have a repossession you’ll have a much easier time getting a car loan. In either scenario you’ll have to settle for a secondary car loan which is better than no loan at all if you need to get a vehicle and you don’t have cash.

Your Two Best Choices For A Secondary Car Loan

As a finance manager in a car dealership for several years, I came across two sources for the above scenarios. The first one is Road Loans and the second one is Drive. Again there are several variables that could affect getting a loan or not, but in my opinion if you fall in either of the above credit situations the go to either www.roadloans.com or www.driveTime.com.

If you are unable to get a loan with either one of those two sources, then you’ll probably have to go to a car dealership that specializes in secondary credit and more than likely they will be able to help, just be prepared to pay an extra high interest rate. Good luck.

The Art of Negotiating

The Art of Negotiating