Expect the Unexpected During COVID-19
If the COVID-19 pandemic has taught us anything, it is that things can change when you least expect it. It’s incredibly easy to build a false sense of security because most days, things go as planned. You wake up, go to work, come home, and do it all again the next day. But we all know that viruses don’t follow the rules of your routine.
The world, as we knew it, simply doesn’t exist right now. Millions of people now face a reality in which there is little to no savings to fall back on, no job or income, and the prospect of homeschooling children on top of everything else.
Leaving the house, however, is still a necessity for some. With most of the country at some level of lockdown, the roads are clearer than ever. Emboldened motorists are using the abandoned roads as their personal race track, testing out speeds over 100 MPH. This recklessness can have a far-reaching impact.
What if you get hit by a speeding driver? The insurance company will pay a claim based on the value of your vehicle. But, we all know that cars start to depreciate in value as soon as you drive off of the lot. A discrepancy in the value of the car and the amount owed can leave you footing the bill on a car you can no longer drive. Need some real-world examples? I’m glad you asked…
Scenario
John bought a used car for $20,000. He has had the car for a few years but when he and his wife find out that they are expecting a new baby, they look into refinancing it. This helps John save more money each month so that he can put more aside for the baby, but to get the monthly payment that John wants, he has to extend the term of the loan. Two years later, when John would have had his initial loan paid off, he still owes quite a bit of money. In fact, he owes more than the car is worth. If John were to get into an accident, or if the car was stolen and deemed totaled, John would have to make payments on the balance that his insurance company did not cover.
John does have the option to finance a new(er) car and roll over the negative equity, but that can limit John’s choice of vehicles. Many lenders have restrictions on how much over the value they are willing to finance. John will have to compromise on his next car, or pay the difference to his lender. Many people don’t have enough in savings to cover an unexpected bill of a few hundred dollars. How would they be able to cover thousands?
What did John do wrong?
If you are thinking the refinance was a bad choice, that’s not necessarily true. A refinance is not inherently bad – it simply comes down to priorities. John was prioritizing his future baby and expenses that needed to be covered for his family, which meant a slightly longer-term paying his newly decreased car payment. This works for John because he reviewed his budget and set goals based on his financial needs. John went wrong by not adding a GAP policy to the loan.
Need a refresher on GAP coverage?
GAP (Guaranteed Asset Protection) is a policy that covers a remaining portion of an auto loan where a loss occurs, leaving a balance still due.
If John had GAP in place, the credit union would be able to file a claim to pay off the remaining balance while protecting John’s credit and not forcing him to carry negative equity into a new car loan.
The good news is, adding GAP to an auto loan with your credit union will be less expensive than asking your dealership at the time of purchase. Since credit unions are not-for-profit, they can offer superior products at a more affordable cost to members. Our GAP policies are a fraction of the $800+ GAPs sold by dealerships. Want to know more about the rewards of credit union membership? I wrote a blog about it.
But wait…there’s more! Some GAPs offer a bonus when you finance your next car with a specific lender. This is called a GAP Plus. I can only speak for our GAP policies, (so do your own research) but when you have GAP Plus:
Your car loan will be paid off.
The deductible for your comprehensive or collision claim will be reimbursed.
And, you will receive $1,000 towards the purchase of your new car (provided that it is also financed with InFirst Federal Credit Union).
GAP policies may be added onto an existing loan, so if you do not already have one, I strongly urge you to consider it. You won’t even have to pay out of pocket – it can be financed into the loan.
Let’s close out this post by saying…anything can happen. We are experiencing something that the world has never experienced before. Some things, you just can’t control…no matter how hard you try. When something comes along that you CAN control, go for it. It might be as small as adding protection to your loan, but in my book, that’s a win-win.
Do you have questions or comments about this post? Feel free to leave me a note below, or email me directly.
Krista Kyte is a personal finance blogger and personal banker with over 17 years of experience in the financial industry. Krista is passionate about helping our members understand their financial situations. She writes tips that will help consumers reach and maintain financial security, and start living the life they’ve always wanted.
