What are ancillary products (and are they really worth it)?
If you’ve ever purchased a vehicle, you’re probably familiar with the same old spiel—the finance representative at the dealership sits you down and begins offering you product after product to protect your interest, and if you’re like most people, you end up feeling overwhelmed and confused.
You may be wondering what other ancillary products exist and if they are really worth it? Ultimately that decision is up to you, but here we’ve highlighted some features and benefits about different loan protection options to help you make an educated choice the next time you’re faced with the decision to add ancillary products. Check them out below.
If you’re in a serious accident or your car’s been stolen, the last thing you want to hear is that you owe more on your car loan than the car is worth. GAP insurance (or Guaranteed Asset Protection) is protection offered by finance companies, either through a dealership or through your credit union or bank, to cover any difference on your loan (that your insurance doesn’t pay) if your vehicle is totaled and/or stolen.
Some things you may want to consider as you think about GAP insurance include:
- The cost of GAP can range from $300 to as much as $900 depending on where you purchase this coverage (e.g., through a credit union or bank versus a dealership).
- If you are upside down (meaning you owe more than the vehicle is worth), GAP can be a huge money saver. For a relatively small investment of $300 (competitively priced GAP), you could save thousands down the road. On the other hand, if you end up paying $900 (on the higher end of GAP coverage), your margin of savings will be much less.
- The key is knowing your loan-to-value (LTV). LTV is a percentage based on the amount you owe divided by the value of your vehicle. Example: if you owe $20,000 on your vehicle, but it’s worth $15,000, your LTV is 133%. Generally speaking, if you are over 90% LTV, you could benefit from GAP coverage. On average, cars depreciate roughly 19% in the first year, and as much as 50% in the first three years—unless you plan on paying off your car in three years, GAP could be a huge money saver.
- Another factor to consider is some GAP policies will also pay your insurance deductible, so instead of paying $500 or $1,000 or higher (depending on your deductible), you pay nothing out of pocket.
GAP insurance doesn’t necessarily make sense for everyone, though. If the amount you owe is less than the car’s value, or only a little more, there’s no reason to keep GAP insurance because there will be little or no payout possible. Additionally, you should remember to cancel GAP insurance if you ever sell your car.
Mechanical Repair Coverage
When that weird sound coming from under the hood turns into a big repair bill, having Mechanical Repair Coverage can come in handy. Mechanical Repair Coverage (MRC) or extended warranties are offered in addition to the manufacturer warranty. The cost of extended warranties varies greatly depending on the make and the model of the vehicle, and who you purchase the extended warranty through.
It is important to note the difference between MRC, an extended warranty, and regular car insurance. Your car insurance covers damage caused by a collision, theft, weather event, or other incident, while MRC typically covers vehicle parts after a mechanical breakdown that’s a result of normal use. MRC pays the cost of covered repairs directly to the repair facility, with no out-of-pocket expenses for you aside from any applicable deductible. Similarly, extended warranties cover vehicle parts after a mechanical breakdown that’s a result of normal use. There are also extended warranties that cover only specific areas of the car, such as powertrain warranties, which cover the powertrain and associated parts.
Here are a few key questions you should ask yourself before considering the purchase of an extended warranty:
- How many years/miles does my manufacturer warranty have left on it? Most manufacturers offer a three-year/36,000-mile factory warranty.
- What is the difference between the basic manufacturer warranty and the powertrain warranty? The basic warranty typically covers everything bumper to bumper, whereas the powertrain warranty only covers the powertrain and associated parts.
- How long do I intend to keep the vehicle?
- How much will repairs cost if I encounter them down the road?
Most extended warranties cover you well over 100,000 miles—if you plan on keeping your car for longer than that, an extended warranty could be a great money-saving option. Some institutions will allow you to extend the term of your loan in order to absorb the cost of coverage while keeping your monthly payment the same. Of course, doing initial calculations and analyzing your budget and needs is necessary before making any financial decision. Mechanical repair policies can be quite comprehensive, but like any insurance product or extended service plan, they won’t cover everything, so be sure you understand what is covered.
Loan Protection is just like it sounds: protection that covers your payments or the entire loan balance following a significant life event, such as loss of life, unemployment, disability, and family medical leave. Some institutions, such as Georgia’s Own, provide additional protection for accidental dismemberment, terminal illness, hospitalization, and loss of life of a non-protected dependent. The cost and coverage vary from institution to institution, so it’s important to do your research. Most institutions have a cost per hundred dollars of the current loan balance.
Some highlights of loan protection programs include:
- The events covered by most loan protection programs are: loss of life, disability, unemployment, and family leave.
- Most institutions offer various loan protection packages that can cover one, two, three, or all four of the life events mentioned. Some institutions offer additional coverage.
- Loan protection programs are available for most types of loans.
- There is typically a cap of coverage over a certain dollar amount.
Benefits of loan protection programs:
- Loss of Life protection can ease the burden on your family, and your debt can be completely canceled.
- Disability protection could cover your payments for you when your income might be drastically reduced due to a disability event (most competitive employers only offer as much as 60% of your salary for a short-term disability).
- Unemployment protection could be invaluable in a time where you’ve lost your job unexpectedly and are unable to make your loan payments.
- If you are unable to work for an extended period of time, family leave coverage can help you maintain the same level of income.
There are a number of loan protection options available to help protect you when faced with the unexpected. Although these services come with a cost, it may be worth investing in the peace of mind these protection programs offer. Review your financial situation in detail so you are confident that getting a policy is the best approach for you. And regardless of your choice, be sure to have some emergency funds available for any unexpected expenses.
- GAP insurance is an optional car insurance coverage that helps pay off your auto loan in the event your car is totaled or stolen and you owe more than the car’s depreciated value.
- Mechanical Repair Coverage is a protection plan for your vehicle that prevents you from having to pay for damage due to a mechanical breakdown or part failure.
- There are various loan protection programs available that cover your payments or the entire loan balance following a significant life event, such as loss of life, unemployment, disability, and family medical leave.
Overall, these ancillary products are add-ons that may not be essential, but enhance the protection of things like your car or even your loan, and can help you cover any unexpected expenses. Ultimately, the decision to purchase an ancillary product is up to you and what you decide is best for your situation.