GAP insurance is a common and optional insurance coverage that many new car buyers use. But if you’re a borrower with bad credit, GAP insurance can help you too, even if you’re not financing a brand new vehicle.
The cost of bad credit in financing a vehicle
If you have bad credit, you might 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 dealerships are raising the price of their vehicles for bad credit borrowers – we’re talking about interest charges.
Your credit score is usually the most important factor in the interest rates for which you can qualify. If a borrower with bad credit and a borrower with good credit bought the same car at the same price, it is very likely that the borrower with bad credit will pay more over the life of the loan just because of the fees. interest.
Since your interest charges can make it difficult to pay off your loan quickly, negative equity is a real risk. Negative equity is when you owe more on the car than it is worth. This can happen if your car is losing value faster than you can pay off your loan.
If you were to have an accident or someone steals your vehicle while your car is in a position of negative equity, it can create a big problem for you. Full coverage auto insurance usually only pays for the value of your car at the time of the incident. If your vehicle were to be destroyed in an accident, it could mean that you still owe your auto lender money if the car had negative equity, even if it is destroyed and / or out of control.
This is exactly why GAP insurance can be useful for those who take out bad credit auto loans. The gap, or guaranteed asset protection, literally covers the “gap” between the value of your vehicle and your loan balance. If you are getting a car loan with bad credit and want to protect your wallet, it may be worth considering.
How GAP Insurance can help you
If your car is stolen and has never been recovered or destroyed in an accident, and you have full coverage and GAP insurance at the time, it is very likely that you have nothing to worry about. pay out of pocket). Full coverage comes in to cover the value of the car, and GAP insurance can pay off the remaining loan balance.
Here is an example :
Bob has a truck that was recently destroyed and deemed unsafe to drive, and 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. Full coverage was able to pay off the $ 15,000, and GAP Insurance paid the remaining $ 4,000 to Bob’s lender, successfully paying off the truck loan.
If Bob is in the same situation without GAP, the vehicle is still reimbursed by the insurance company, but Bob still owes the lender $ 4,000 out of pocket.
If you are like Bob and have negative equity, but do not have GAP insurance, you will still owe the lender the amount you are underwater even if the vehicle is deemed unsafe to drive. . When a vehicle is totaled or stolen, you still have to pay the lender what you owe to end the loan agreement.
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 cheap. Often times, the cost can be added to your insurance premium or to your monthly car payment. If you buy a policy for $ 40 per year, you only pay $ 3.33 per month for this additional protection.
Many insurance companies offer this optional coverage, and you can usually purchase it from the dealership while completing your paperwork with the finance and insurance manager. Auto lenders sometimes offer their own options for GAP insurance coverage.
As a general rule, GAP insurance should be purchased soon after financing your vehicle or within a certain period of time. In addition, most insurers prefer to cover new cars or used cars in good condition.
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Compare $ 20 to $ 40 per year to having to pay $ 4,000 out of pocket as in the example above. GAP insurance could save you a lot of headaches, money, and avoid having to pay for a vehicle you can no longer drive.
For many borrowers with bad credit who expect a high interest rate on their loan, GAP insurance can provide some peace of mind. It is quite inexpensive and many insurance companies offer this coverage. However, when you have bad credit, finding auto insurance isn’t usually the hardest part of the car buying process – it’s about finding a lender who can handle your credit situation. We want to help with this to Auto Express Credit!
We’ve built a nationwide dealer network over the past two decades, and we want to find a dealer in your area who is ready to help bad credit borrowers. Get started on the road to a bad credit auto loan by completing our free auto loan application form.