When you finance a vehicle with bad credit, purchasing GAP insurance may be a worthwhile investment. Financing can get expensive, especially if you have a high interest rate. With this comes a higher risk of negative equity which can cause issues down the road. GAP insurance can offer some peace of mind, though!
GAP Insurance Defined
GAP insurance is Guaranteed Asset Protection coverage. It’s optional, in most cases, and usually costs borrowers around $20 to $40 a year. The cost can be added to your monthly car payment, insurance premium, or you may have the option to pay it in full.
What GAP insurance does – that full coverage doesn't help with – is to pay your loan balance in the event of theft or an accident where your vehicle is totaled. Full coverage car insurance only pays up to the vehicle’s value at the time of an incident, not your loan balance. Your contract with the insurance company is separate from your loan contract. If your vehicle is totaled, your insurance company is under no obligation to pay your full loan balance if it’s more than the car’s value.
GAP covers the “gap” between your car’s value and your loan balance. After full coverage pays out what it can, GAP insurance steps in to pay your lender the rest. This is extremely helpful if your vehicle has a large amount of negative equity, which is a common situation for borrowers with bad credit.
Bridge the GAP of Negative Equity
Negative equity is when your vehicle’s value is less than your loan balance. It’s also called being upside-down on your loan, or underwater. It’s not normally troublesome on its own, and it's a common predicament for borrowers that finance vehicles with poor credit.
Borrowers who can’t pay down their loan fast enough to keep up with depreciation (loss of value over time) may fall into a negative equity position. If you have a high interest rate that’s increasing your loan balance faster than you can pay it down your loan, then negative equity is a very real possibility. Bad credit borrowers are especially at risk for this since they’re more likely to qualify for a higher interest rate on their loans.
When negative equity causes problems is if the car is totaled and you’re left with a loan balance after the insurance company pays out. However, even if you have a high rate and are at risk for being in a negative equity position, GAP insurance can give you peace of mind.
How to Buy GAP Insurance
There are likely many different ways you can purchase GAP insurance for your bad credit auto loan. Most borrowers get GAP insurance at the start of their car loan, and it’s typically offered by the dealership when you’re finishing up the car-buying paperwork. Often, insurers require that GAP be purchased soon after you finance the vehicle.
A dealership’s finance and insurance department can usually offer it, or you have the option of asking your own auto insurance company for GAP. Most mainstream insurance companies offer it, too. Sometimes, you can even purchase GAP coverage from your auto lender.
Shopping for a Bad Credit Auto Loan
It’s easy to get swept up in the excitement of buying your next vehicle, but don’t forget that when you’re financing, you need full coverage auto insurance. While you’re shopping for your next car, or even just looking for a lender that can assist you with poor credit, remember to look at rates offered by various insurance companies. Many can offer quick quotes over the phone if you know which vehicle you plan to finance.
For many bad credit borrowers, finding an auto lender that can help with poor credit is the first step to getting a car loan. And here at The Car Connection, we want to make the search for a dealership that’s signed up with bad credit lenders easier.
To get matched to a special finance dealer in your local area that has bad credit lending resources, complete our free, quick, auto loan request form. Using our nationwide network of dealerships, we’ll look for one near you at no cost and with no obligation. Get on the right path to your next car loan right now!