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Do I Need Car Loan Insurance?

05/10/2019 @ 1:09 AM

Most Canadian drivers think the only insurance coverage they can carry for their car is for collision and liability. While those two services are necessary to have if you’re going to drive on public roads, there is also the option of choosing car loan insurance. If you’re financing your car, whether it’s through a bad credit car loan in Scarborough or some other means, insuring yourself against disaster is a good idea.

You never can tell what the future holds. This is what insurance is all about, because you never know when you’re going to need some protection against disaster when it strikes.

Accidents Happen

No matter how careful you are, accidents do happen. You could be the driver who always looks both ways before entering an intersection, checks blind spots before changing lanes, honks before backing out of a driveway or parking spot, never speeds, brakes early, and does everything else right, yet still get hit by another driver who isn’t paying attention.

Accidents often happen when you’re least expecting them

Even if you’re careful, it only takes one moment of not paying full attention for disaster to strike. You might spill your drink, look down for a second, and that’s when a car turns in front of you. You kids might be fighting in the backseat, and when you tell them to quiet down and stop fighting, you slip up and crash. Or you could be driving along and hit a patch of black ice, completely losing control and crashing.

Just because you’re careful doesn’t mean insurance isn’t necessary. While collision and liability coverage can help, they aren’t always enough.

Totaled Car

If a crash causes enough damage to your car, the insurance company might total it. That means the car will cost more to fix than it is worth. While it might sound great to have the insurance company cut a huge check for your car, it might not be enough to cover something like a bad credit car loan in Scarborough.

Quite a few Canadians are upside down in their car loan. That means they owe more than their car is worth. This happens for several different reasons:

Car Depreciation

Many cars lose value quickly within the first two or three years. This is especially true of many luxury models, although some more common cars can still see a third or more of their original value almost evaporate overnight. You should know this before getting involved in a bad credit car loan for Scarborough residents, or any other car loan.

Car values usually go in one direction, down

If you did your homework before buying a car, you might have purchased something which holds its value exceptionally well. Dealerships are expert at getting you to buy the cars which lose value quickly by throwing out extra incentives. Things like cash back, a reduction in price, etc. are tempting when you’re shopping. Or you just might really prefer a car which doesn’t hold its value well over time. That’s not completely a bad thing, as long as you know it makes getting upside down in the loan much more likely.

No Down Payment

Shoppers often think getting into a bad credit car loan in Scarborough without putting any money down is a great idea. The fact of the matter is a zero down payment means you’re more likely to get upside down in the loan for the first year or two of the loan, or maybe even longer.

If you put down a healthy payment up front, that would soak up all or most of the drop in the car’s value. Without that down payment, you’re left owing more than the car is worth, which is awkward if the car gets totaled.

High Interest

How much interest you’re paying on a bad credit car loan in Scarborough is usually an expression of how comfortable the lender is with your ability to make the payment each month on time. If you’re a high risk, the interest rate will be high, so the lender is making more, just in case you suddenly stop paying.

A high interest rate means more of your monthly payments in the early part of the loan is going toward interest and not the principle, or the original amount you borrowed. That means in the early part of paying on the loan, you’re going to get upside down faster. Of course, if you have a high interest rate and no down payment, you’ll become even more upside down than if you’re just facing one or the other.

Rolling In Other Loans

Another factor which will put you upside down in a car loan immediate is if the dealership where you bought your new car rolled in the remainder of your previous car payment into the new one. Dealers will sometimes refer to this as “soaking up” the old loan. That negative equity or the amount you owe which is beyond the value of the car doesn’t just go away. It’s instead added to the new loan, so you still have to pay it.

Gap Insurance

Being upside down in a bad credit car loan in Scarborough is scary, especially since you could total your car while driving safely everywhere you go. Suddenly owing the lender thousands of dollars can be stressful and put you in a serious bind.

Gap insurance can help give you peace of mind

This is where gap insurance, which is a form of loan insurance, could really help. It literally closes the gap between what you owe for a car and what you get if it’s been totaled. If you’re upside down in your loan and know you won’t be able to fix that problem for some time, gap insurance is a cheaper way of covering everything in the event of a serious accident.

While it might not seem fair that you would be left to cover the difference between what the car is worth and what you owe for it, gap insurance at least is a good solution. Without it, the lender will be demanding that you produce the rest of the money, otherwise you will be subjected to collections. That’s a scary scenario, especially after you’ve been through a sudden and jarring accident.

Let’s say you have a car which you paid $30,000 for. You still owe $28,000 for the car, but it has depreciated in value to where it’s only worth $24,000. You hit a patch of loose gravel on the road, spin out, and collide with a tree. The car is totaled, so the insurance company will cover $24,000 as part of the comprehensive plan you carry. Gap insurance will then kick in to cover the other $4,000 you owe on the car loan, that way you don’t need to get that money together as you’re making arrangements for financing on a new car.

Most people choose gap insurance for a bad credit car loan in Scarborough if it’s for a new or newer car, since they tend to lose their value quickly. You might still go for it if you know getting upside down in your loan is a inevitable. Once you’re in a better situation and can pay the car loan down more, gap insurance might not longer be necessary.

Most insurance companies will only offer gap insurance if you already have comprehensive and collision coverage on the car. Since this is what most lenders require while you’re financing a car, you should already have that covered.

If you want gap insurance, the best place to start is your car insurance provider. Most offer it and will bundle the service with your other insurance policies, which can lead to savings. It usually only costs a few dollars or so each month, and considering the financial burden it can prevent, it’s well worth it.

Gap Insurance and Leasing

Most lease contracts require you to carry gap insurance. In fact, most of them include the gap insurance payment in the monthly lease amount.

Still, it’s best to look over your lease agreement and see if it does indeed include gap insurance. If it doesn’t, getting gap insurance is a relatively cheap way to guard against what would otherwise be a financial disaster.

Loan Insurance

There’s an alternative to gap insurance, called loan insurance. Now that you know how gap insurance works, you might find that loan insurance is the better fit for your situation.

Like gap insurance, loan insurance helps make up the different between what you owe for a car loan and what the car is currently worth. You already understand what kind of peace of mind that provides, which is huge. It’s a good way to know that no matter what happens, you’re covered, at least partly.

The difference is in how much is covered by loan insurance. Typically, it’s a set percentage of your car’s current value. For many policies it’s about 25 percent, which may or may not be enough to pay off the car loan entirely. So you must decide if loan insurance is a better way to cover any gap between your car’s value and the amount you owe for the loan, or if gap insurance is best.

For example, if you financed at a high interest rate, loan insurance is probably not a good fit. If the car is totaled, it would likely cover less than the gap you owe, and that’s where gap insurance would be a better solution.

Keeping Tabs

When you have loan or gap insurance, it’s wise to constantly monitor the value of your car. Usually, depreciation slows down after the first one to three years of a bad credit car loan in Scarborough, so keep that in mind. Although, if you have a steep interest rate, you could stay upside down in the loan for some time.

Once you owe less than what your car is worth, paying for either loan or gap insurance is a waste of money. That’s when you should drop that portion of your insurance coverage and just pocket the difference.

You can look up your car’s value on Canadian Black Book. The website is free to use and it walks you through the process of figuring out what your car is worth on the open market. It’s an invaluable tool when figuring out how to manage financing for any car, especially if you’re buying something used and want to see if the asking price is fair or not.

Loan Insurance Continued

Loan insurance can also work for financing your car, sometimes called loan protection insurance or credit insurance. Instead of covering part or all of a gap between the value of a car and what you owe in the event it has been totaled, this insurance helps you make payments in times of hardship.

Just like how accidents can happen at any time on the road, even when you’re careful, financial disaster can also strike without warning. Sudden disability, unemployment, or medical emergencies can leave you in a financial pinch.

Usually, this service is offered when you’re signing paperwork for your car loan. If you fall on hard times and qualify for the circumstances the policy covers, then your car payments will be made on your behalf for a certain number of months. Just like any other insurance, this is something you hope to never use but you’re glad is there to provide that additional security.

Not Required

Sometimes dealerships will tell car shoppers they have to take out loan or gap insurance to be approved for a specific loan. That is absolutely false, but some people fall for the story and think they must get it. While loan or gap insurance is great to have, you don’t have to get it just to finance a car. You should sign up for it as a way to have that extra reassurance, not because you’ve been pressured into it.