Mon, Aug 29, 2011 Posted by Kara

There are many cases in which adding loan gap insurance is an advantageous for bad credit auto loans.  What specific type of loans does loan gap insurance make the most sense: a loan where you have a down payment less than 15 to 20 percent of the purchase price or a loan that is financed for beyond the standard 3-year, 36 month term.

Why loan gap insurance?  First, what is the definition of gap insurance?  The “loan gap” part really defines it because if your car is totaled in an accident and the market value of the car is less than what you still owe on the auto loan there will be a “gap”.  Your auto insurer will pay the finance company only the current market value of the car: not what you paid for it or what you still may owe the bank.  This is where loan gap insurance kicks in: it pays the finance company the difference.  You still have your collision deductible but that is a lot less of a hit to take than loan amount versus market value.

New cars, particularly, and used cars as well depreciate in market price as soon as you drive them home and begin putting miles on them.  Translation: if you recently bought a car for 18,000, drove it four months, put 1,000 miles per month on it the car could depreciate up to 3,000-dollars.  Now, if you put a hefty down payment of 15 percent or higher you are probably in the clear.  If you put less than 15 percent down then your insurance company takes the 3,000-dollar depreciation plus your $1,000 you have made so far in payments and pays the finance company 14 thousand dollars.  You still owe the finance company 3 thousand dollars if you did not purchase loan gap.

How much is loan gap insurance?  It runs around 20 to 40 dollars a month extra on your car payment.  You finance it in with the car when you and the dealer are working up the sales contract.  Not all dealers will mention it so be sure and ask about gap insurance.  Definitely ask about gap insurance if you are putting less than a 15 percent down payment on the car.

In summary, many loan add-ons are not worth it.  Additions such as rust proofing.  If you are financing a vehicle for more than 3 years and with less than 15 percent down loan gap is a secure benefit to have.