So, let’s say you owe $16,002 on your car, and it gets stolen or sucked into a sink hole. The insurance pays out the actual value of your car, $11,112. You still owe the finance company $4,890 for a car you no longer have, leaving you half what you need to get back on the road in a comparable vehicle. If that.
Doing some basic math: This sucks. You might say you’re sunk.
This is what happens when you’re upside down on your loan, or when you owe more money to the bank than your car is actually worth. This just part of car ownership for many of us… bummer.
This is Where GAP Insurance Comes In
Guaranteed Auto Protection, or GAP insurance, is an additional policy you take out against your auto loan that will pay the difference between the value of your car and what you owe. In the above example, it would cover that additional $4,890 dollars you owed your lender.
GAP coverage is very important if, at any time in your loan term, you will owe more than your car is worth. Good indicators of whether or not you will need GAP insurance are:
- Whether it is a new or used vehicle
- Down payment
- Loan term
- Interest rate
Buying a Used Car Crushes the Gap
If you buy a brand new car in Winnipeg, the moment you drive it off the lot it becomes a used car and depreciates by about 11% on average. That’s just one minute of ownership. By the end of your first year with that car, it’s worth about 80% what it was when you bought it. In five years time, you’re looking at a loss of about 60%.
Unless you’re paying for a new car in cash, you’re going to be upside down on your loan for years. That’s a pretty terrible investment. Also: you need GAP insurance.
Buying a used car is a much better value proposition. You still get the car, but somebody else experiences all depreciation depression.
Get Ahead With a Down Payment
We know it’s not possible in every situation, but if you can you should make a down payment on your used car purchase. It’s possible to be ahead on your auto loan before you leave the lot. That feels great, and you may not need gap insurance.
The Thing About Terms and Rates…
Two big factors in determining whether or not you’ll need gap protection are your loan term and interest rate. The shorter your loan term, the more quickly you’ll build equity on your loan.
On the other hand, a longer loan term means you’ll have more affordable monthly payments but you’ll build equity more slowly.
A big challenge for people with bad credit is they often can’t afford a big car payment, and have to go with a longer term loan. Making things more challenging, these same customers have higher interest rates putting yet another damper on their ability to build equity.
If find yourself in this situation your best bet is to get together as much down payment as you can, select the shortest term you can afford, and absolutely, certainly, definitely get gap insurance.
At Ride Time, our finance team can help you figure out if you need gap protection. Based on your interest rate, we can look at different term options and determine your equity over time.
How to Get Gap Insurance
There are two main ways to get GAP insurance. You can get it directly through a car dealer, like us here in Winnipeg. Or you can get it from MPI in the form of New Vehicle Protection.
Both options have their advantages.
- Dealer provided Gap Insurance is paid up front, but in most cases can be added to your monthly payment. You’ll be covered for the full term of your loan so you’ll never have to worry about it again for as long as you have your auto loan. And you’ll get a $500 credit towards the purchase of your next vehicle with us (I mean who else, right?)
- Gap protection from an insurance company is another option. Instead of paying a lump sum this becomes an additional fee on your insurance premium. This is non-refundable, but you’re paying for it as you go.
New Vehicle Protection from MPI comes with some limitations. First of all, if your vehicle is older than one model year, forget about it. If your car does qualify, you can only get coverage for 12 or 24 months. Plus, there’s no credit toward the purchase of your next vehicle.
Basically, getting it from MPI is a good option if you don’t have a better option. We’re a better option, so…
Don’t Get Stuck Upside Down With Your Loan
Sure, if you have bad credit, you may have to deal with a higher interest rate. Unfortunately, this also means you’re going to be building equity more slowly.
But the truth is, most of us have been there. We all end up a little upside down on our loans at some point. That doesn’t mean you have to just cross your fingers and hope you don’t get stuck with it. Gap protection can help you protect your investment, and get you back on the road sooner in a comparable vehicle.
We’re Here to Help.
At Ride Time, we pride ourselves on being your friends in the car business. We are passionate about credit education and helping people drive home in a car they both love and can afford. Need help finding a vehicle or wondering if you should consider gap protection? Contact us today, we’re happy to answer your questions.
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