What You Don’t Know about Gap Insurance

When one searches for “gap insurance”, the results are mostly about its definition, its importance, and whether one should buy it from the dealership. But it is rare to get information on how and where to buy it if one decides to get it.

People should consider gap insurance if they have an auto loan. When the car gets totaled in an accident, they still have to pay off the loan. But regular auto insurance only pays the maximum amount of the car’s current value. Because of depreciation of car value, that means the amount the insurance company will pay is often less than what one actually owes to the loan lender. The gap insurance then kicks in to pay off the difference.

Photo from My Stock Photos

          If you know what gap insurance is and decide to get one, then where and how to buy? It is widely known that it is not a good idea to buy at the dealership. So we exclude that option.

The best way to buy gap insurance is to shop together with the regular auto insurance. Here is the trick: almost all of them do not sell gap insurance independently, you have to either have your auto insurance with the carrier and add gap insurance to your policy, or have your auto loan with the carrier.

For example:

State Farm: in order to buy gap insurance from them, one needs to take its auto loan. If one has an auto loan from another lender, he/she will not be able to buy gap insurance from State Farm even if he/she already has auto insurance with them.

Progressive/Liberty Mutual: in order to buy gap insurance from them, one does not have to take auto loan from them. But one needs to switch auto insurance to them, and then add gap insurance to the policy.

Different insurance companies have varied policies regarding gap insurance. If you are going to take an auto loan and really need gap insurance, you need to be careful about from where to buy your auto insurance policy. It will be more convenient if you have the option to add gap insurance to your existing auto insurance coverage.

If you are refinancing an auto loan, you can also consider companies like State Farm, who sells auto and gap insurance all together. Unless their rate is competitive, I would not switch an auto loan just in order to get its gap insurance. 

I want to disclose that I am not familiar with gap insurance when leasing a car. I guess the theory and practice are similar. Financial wise, leasing cars is a bad idea.  

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Auto Loan---Don't be Fooled by Low Rates

Beetle. Photo credit: My Stock Photos

A friend of mine currently has an auto loan with an interest rate of 8%. To me, that is insanely high. It is a cruel reality that many of us have similarly crazy auto loan interest rate. Seeing that the loan interest rates are pretty low recently, I advised my friend to refinance his auto loan. I offered to help to find the best refinance deal for him due to his busy work schedule.

I have never done an auto loan, so I did the hard way. I compiled a list of prospective lenders including some well-known banks and online lenders. That included places like Wells Fargo, US Bank, Bank of America, Capital One, Santander, and Carfinance. Most of them have detailed information regarding auto loan on their website, so all I needed to do was visiting their sites. Before doing this, I did visit Bankrate to see rates and prospective lenders, but there were only two to three institutions listed. I needed more than that in order to compare well. That was why I made a list by myself. 

My first step of rate comparing was to find out the lowest rate they could offer. That meant the rate they could offer to someone who had a perfect credit score and a clean loan application. At this step, it was easy to get rid of some of the prospective lenders. For example, if most lenders’ best rate was 3.00%, but one could only offer 4.00% at best, my instinct was simply walking away from the higher one.

The irony of auto loan rate shopping is that, many prospective lenders are not willing to tell shoppers a rouge rate range they can offer until they pull their credit scores. I found that annoying. Not many people are willing to let others pull their credit scores unless they liked what they saw or heard from their preliminary contact. I always tried to explain to these institutions that I needed to have some idea of their rates before going to the next step. Unfortunately, some were too stiff and they lost our business right there.

The second step was to work closely with institutions on my short list. I only had two left. Their lowest rates were around 2.50%. Both were reputable institutions and had local branches (real people to talk to if needed). At this step, I looked into their requirement of credit score in order to get their best rates. It turned out one of them required a much higher credit score in order to get a good rate. Eventually, my friend went with the remaining one, and he got a rate of 4.00% or so.

What I have learned in this process was that, do not be fooled by the low interest rates you see on advertisements. They are often put there to lure people to finance with them. They want you to borrow money from them, and with a much higher interest rate than what you had in mind!

No matter what kind of loan you are looking for, you need to shop around carefully. Ask about their requirement of credit scores and other related information. Do not be intimidated by them. If they refuse to provide information you need, walk away. If their customer service makes you uncomfortable even before you become their customer, think how they might treat you after they already sold you stuff. It is better to end with one that has a higher interest rate but good customer service, as compared to someone with a low rate but bad customer service. Bad customer service might add a lot of trouble to you in a long run.

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