Find Out How to Get More Out of Your Auto Loan
For most of us, owning a car is not an option, but a necessity. The problem is that over the years, buying a car has gotten more complicated and increasingly expensive. That’s why we’ve created this guide to help you navigate the choices that will impact how well your auto loan meets both your short- and long-term needs. Let’s look at some of the smartest ways to get more out of your auto loan.
What Is Auto Loan Protection?
If you've purchased a car recently, you might recall being asked about a number of different ancillary products, commonly known as protection plans. You may have seen these while finalizing your loan terms in the form of warranties, protection plans, services, or other optional coverages.
Some of these are useful options, advisable for any auto purchase, but others are frivolous or unnecessary. In some cases, dealers package products like these to squeeze every possible penny from borrowers who finance with them. These tend to be more expensive and sometimes aren’t actually that beneficial. Here’s how to determine if an ancillary product improves your auto loan, or if it’s an expense you should avoid.
Tips for Purchasing Additional Auto Loan Protection
Most lenders offer protective options with their auto loans, but sometimes it can be hard to distinguish what is truly beneficial and what is nothing more than an added line item on your final contract. The best way to determine whether such a product is a good idea is to ask yourself three simple questions:
1. What Does it Cost?
Determining the cost may seem straightforward, but you always want to do your due diligence. Any time you consider adding additional coverage to your auto loan, we recommend finding out the following:
- Is payment due up front, or will it be added to my monthly payments?
- If distributed across the life of my loan, how much will this coverage add to my monthly payment?
- Is there any sort of additional fee associated with my coverage?
- Will I have to meet an additional deductible to use my protection?
- Does my lender offer a rate discount if I choose this coverage?
Pro-Tip: At First Service, we offer rate discounts on several ancillary products. These discounts are still available even if you get pre-qualified for your auto loan.
2. What Is the Benefit?
The coverage's plan benefit will likely be the easiest question to answer. That’s because most lenders will be actively trying to sell you on these products whether you really need them or not. And that’s what makes the third question so important.
3. How Likely Am I to Use this Benefit?
The first two questions may seem straightforward, but this one trips up many borrowers. Additional coverage may seem like a good way to protect your vehicle when you buy it, but it’s important to consider how you’ll be using it before making a decision. For example, if you drive a lot and expect to put many miles on your vehicle, it makes good sense to choose a plan that will keep it serviced or help pay to get you running again if it breaks down. However, those plans don’t make as much sense for someone who doesn’t drive often or doesn’t put any miles on their vehicle.
Another consideration is what it takes to qualify for the benefit. Find out things like deductible requirements, mileage limitations, or types of services that might be excluded before making a decision. Using the example above, a person who plans to drive many miles may expect a specific product to cover tire and wheel damage, but many coverage plans exclude this. Understanding exactly what a plan does and does not cover will help you determine whether that plan is something that may be useful to you in the long run.
Pro-Tip: Don’t wait until you’re applying for an auto loan to think about ancillary products. You should shop around and compare products before getting your loan - just like you compare rates before signing.
Introducing a Few Common Protection Plans
Many Americans are opting for longer-term auto loans, so protecting your vehicle for several years is becoming increasingly important. Here is a closer look at some of the coverage options that keep a car in working order, prevent borrowers from getting upside down on their loan, and even protect borrowers who are unable to make monthly payments because of a major life-changing event.
GAP Coverage is a special program intended to protect you in case you experience a total loss with your vehicle. The way it works is by paying the difference between what your insurance company deems your car to be worth at the time of loss and what you owe on the vehicle. That means that if you experience a loss on a vehicle with a value of $5,000, but you still owe $7,500 on that vehicle, your GAP coverage will pay the $2,500 difference.
There are a few cases in which most anyone would strongly recommend purchasing GAP coverage. Most people would tell you that if your down payment is less than 20% of the vehicle's value, you need GAP coverage. The truth is that many people end up overpaying for vehicles, so down payment percentage isn't always a great indicator. It's a better idea to monitor what your car is actually worth and to stay abreast of whether, at any given time, you owe more than the car's value. Remember, that's where the trouble can start.
Another common suggestion is to purchase GAP insurance only when your loan terms are 60 months (five years) or longer. In truth, the time you're most likely to need the coverage is in the first three to three and a half years of your loan. Don't think that just because you have a short loan that your car will never be worth less than what you owe on it. New cars depreciate rapidly, so we always advise getting GAP coverage pretty much any time you have a loan for your vehicle.
Pro-Tip: Total loss coverage should extend to more than just accidents. Here in Houston, severe weather can be a common occurrence, and the right GAP protection can ensure protection if a flood, hurricane, or other devastating event destroys your car.
GAP Coverage is one of the most common forms of loan protection, and it may sometimes cost thousands of dollars. At First Service, we offer an affordable GAP plan that can earn you a discount on your auto loan if you borrow with us. GAP protection is also available on RV loans, boat loans, and other motorsports vehicle loans financed through the credit union.
Mechanical Breakdown Protection
Even if you are not purchasing a brand new car, you should still consider protection against possible mechanical breakdowns. Similar to some manufacturer warranties, Mechanical Breakdown Protection helps cover the costs if a major vehicle system breaks. Every plan varies, but MBI typically covers the following:
- Engine Parts
- Electrical Components
The cost for a mechanical coverage plan can fluctuate with the make and model of your vehicle. Because it protects against such expensive repairs, such a plan is usually a good idea - if your vehicle is not protected by a manufacturer warranty. Similar to GAP Coverage, Mechanical Breakdown Protection through First Service can earn you a discounted rate on your auto loan.
While warranties and mechanical protection plans may cover extensive repairs for the most critical systems in your vehicle, others may not be covered. Other protection plans typically exclude cosmetic damage and normal “wear and tear” unless you choose a plan specifically designed to cover things like tires, windshields, and dents. Multi-Shield Protection is useful if you hope to keep your vehicle in prime condition over time – especially if you plan to sell or trade it in at some point.
Life coverage provides funds to your family in the event of your passing. Such coverage typically pays off an outstanding loan, but some plans may include a cash pay-out. The amount of your auto loan typically determines the cost of coverage, but it can be an affordable way to ensure your family is left with an asset instead of a debt should anything happen to you.
Disability Income Coverage
Disability Income Coverage helps you make payments if you become sick or disabled and are unable to work. This coverage cancels all or a portion of your payments during any period of total disability, keeping your savings intact and credit standing protected.
Bonus Coverage: The Freedom Auto Loan from First Service
While there are many types of coverage available, it can be hard to find something that offers true peace of mind with all the uncertainty in the world today. That’s why, in 2020, we introduced the Freedom Auto Loan. This loan boasts built-in protections that allow you to walk away from your loan with no impact to your credit if you experience a qualifying life-changing event, such as:
- Involuntary Unemployment
- International Employment Transfer
- Physical Disability
- Self-Employed Personal Bankruptcy
- Loss of Driver's License
- Accidental Death
First Service offers this special protection, and it is available whether you buy your car with us or choose to refinance an existing auto loan. In fact, if you are planning to refinance, we offer a number of protection plans to ensure that your new auto loan meets all of your needs.
One Final Piece of Advice
When it comes to getting an auto loan, there are many things you should consider. It’s a big decision and can feel like a high-pressure situation — especially if you are financing at a dealership. That’s why we always encourage members and prospective borrowers to get pre-approved for an auto loan before making a final decision on a vehicle.
Whether you’re buying a car, truck, boat, RV, motorcycle, or even airplane, you can safely apply online in minutes with First Service and get pre-approved quickly. Once you are pre-approved up to a certain amount, you have 60 days to choose the vehicle you want within your budget. With your pre-approval check in hand, you can visit dealers with a new level of buying power when it’s time to negotiate. It can reduce the stress of buying your next vehicle, and gives you time to research your options before reaching your final decision.
If you are serious about getting a great auto loan, start by getting pre-qualified. Once you’ve taken that step, determine what you really need, and build a loan that checks all those boxes. Remember, our team has decades of experience in helping our members get more from their auto loans. Let us do the same for you.