Have You Weighed the Cost of These Auto Loan Add-Ons?
I see me buying my very own car for the first time last month. Negotiating the purchase and financing on my own wasn’t easy, but it wasn’t as bad as I anticipated. The really difficult part was deciding whether or not to include add-ons to my auto loan.
Not sure what I mean by add-ons? Add-ons include extended warranty outside your manufacturer’s warranty, tire and wheel protection, GAP insurance, paint protection, stolen vehicle recovery, VIN-etching...the list goes on and on!
I’ve been told by many people to never buy an extended warranty on a car, but my service counselor explained to me why many feel that way. Apparently years ago, consumers buying an extended warranty would pay cash up front, to the tune of around six grand, for a warranty they couldn’t even use until their manufacturer’s warranty was up! (This happened to my dad, and the insurance company went out of business before he could use his extended warranty). I, however, did end up purchasing an extended warranty and tire/wheel protection, which came in handy when I ran over a nail the third day I had my car.
Your personality and tolerance for risk largely determines your willingness to purchase or forego these additional protection options. To help you make an informed decision, I asked a few in-house experts to weigh in on these bad boys.
An extended warranty, sometimes called a service agreement, a service contract, or a maintenance agreement, is a prolonged warranty offered to consumers in addition to the standard warranty on a new items. The extended warranty may be offered by the warranty administrator, the retailer or the manufacturer.
Pro: “Extended warranties protect you from financial obligations should major problems with the vehicle occur. Who wants to pay out of pocket when your insurer can pay for repairs?” -Nick Eckl, PSC at Barrett Station
Con: “Oftentime, you’re paying for services you won’t get to use until the manufacturer’s warranty expires.” -Anonymous (Marketing Associate)
Pro-Tip: Be sure to ask which insurance company your warranty is through. (For instance, my warranty is through CNA, which should be around for a very long time.) Also, read through your manufacturer’s warranty and ask your car insurance company what it offers for warranties to decide if you need to pay for extra coverage.
GAP (Guaranteed Asset Protection) Insurance
GAP Insurance covers the difference between the actual cash value of a vehicle and the balance owed on the financing (car loan, lease, etc.). GAP coverage is typically purchased on new and used small vehicles (cars and trucks) and heavy trucks. Some financing companies and lease contracts require it.
Pro: “For autos and boats, GAP insurance is reasonably priced and provides peace of mind for if an auto is a total loss and its value is less than the loan balance." -Charity Chiltz, Sr. Personal Service Counselor
Con: “Unlike an extended warranty, GAP insurance is not passed on to the next owner. Also, it’s like any other insurance: you pay for it hoping you don’t have to use it.” -Boris Nguepsi, Personal Service Counselor
Pro-Tip: Adding another $350 to your total purchase isn’t easy, especially when you consider the financial liability you’re taking on, but it’s best to ask yourself: Can I financially “swing it” if my car is totaled and I have to pay off the difference in its value from the loan balance?
Loan protection insurance or payment protection insurance (PPI) is designed to provide financial support in time of need. Whether the need is due to disability or unemployment, this insurance helps policyholders make monthly loan payments and protect them from default.
Pro: “Debt Protection does what its name states. It protects the member by making the loan payment if he or she becomes disabled, is involuntarily unemployed, or dies. In each occurrence the loan payment would be made for them in times of loss/need.” -Charles Imel, Sr. Personal Service Counselor
Con: Like all other forms of insurance, you buy it with the hopes you don’t need it. So, you could buy it and never have to use it!
Pro-Tip: Consider all aspects here. If your job frequently lays off workers, or you have a dangerous job, it might be worth buying. However, if you don’t drive much or have the means to continue making payments, you could be okay foregoing the insurance.
As you can see, buying a car requires evaluating your risk tolerance. Luckily, there are plenty of options to ease your mind as you make these important decisions. And, if you’re unsure, I know of a pretty great credit union in St. Louis that can walk you through it, from a-z.
If you “C.U.” buying a new car anytime soon, have you given these options any thought? We’d love to hear about it below. Let us help!