Two car insurance policies to quickly stay away from

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OPINION: Here’s something I know to be true. Many car yards earn a lot of money with financing and insurances which are sold as add-ons with the purchase of a car.

Some of these insurance policies are in my opinion resold on commission more than merit.

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In Australia, the situation got so out of hand that their regulator, ASIC, launched a full investigation in the fur.

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It is a fact that thousands of New Zealanders use car financing every month to help them get a car.

It is usually sold online through a specialty lender, through a bank or credit union, or offered directly from the garage. A cursory picture of the interest rates on offer vary widely. We’re seeing anything from about 5 percent a year to even 29 percent a year, but we think the rates are getting higher.

If car loans are not properly managed and repaid on schedule, they can be a financial atomic bomb later on.

That’s why I have a big problem with the upselling of (some) already expensive car loans with additional insurance.

The two big ones are the Guaranteed Asset Protection Insurance (known as GAP insurance) and Mechanical Breakdown Insurance (known as MBI). Like the Australian regulators and Consumer NZ, we are very careful with them.

Christopher Walsh believes that some of these insurance policies are sold on commission rather than merit.

Delivered

Christopher Walsh believes that some of these insurance policies are sold on commission rather than merit.

What is MBI?

Mechanical breakdown insurance covers the repair costs of your car resulting from a mechanical defect. The policy provides a warranty for automotive machinery and electronic failures. Since auto insurance doesn’t cover such mistakes, MBI is designed to protect drivers from unpredictable (and often unaffordable) bills for mechanical repairs.

Our guide explains more, although in a nutshell there is a lot to be aware of as they are expensive and the benefits are arguably limited. We don’t think anyone buying a car should rush into one of these policies without giving it a second thought.

What does MBI cost?

The policies are expensive and often the cost is “added” to the car loan, meaning you pay interest on the insurance. For example, a $900 policy is sold on a car to cover it for three years.

Most people who finance a car don’t have $900 for insurance, so they choose to add the amount to the car loan total and at an interest rate of 15 percent per year, they pay another $385 in interest costs over three years. year . In Australia, ASIC reported that 9 cents of every $1 of policy charged was paid out in claims

Here are the exclusions for MBI long. Your understanding of “breakdown” may not be the same as the insurers. That’s bad news.

What is GAP insurance?

It covers the “gap” between how much your insurer pays you and how much it owes to pay off the loan. The best way to explain it is with an example: GAP insurance pays out when a car is depreciated, you get an insurance payout, and that amount is less than you owe to the finance company.

For example, if your Toyota is insured for $10,000, but you owe your car lender $12,000, then the $2,000 shortfall will be covered by GAP insurance.

How much does GAP insurance cost?

Like MBI, it depends on the car yard or lender. The policy is usually pre-sold, e.g. $500 for the term of the loan. Again, like MBI, these costs can be “rolled up” into the loan cost, meaning you’ll pay off the GAP insurance costs over three, four, or five years (or however long your car loan is).

The more GAP insurance you take out, the more expensive your car loan and the higher the repayments. Our guide outlines alternatives who avoid GAP insurance altogether without increasing a car loan.

Your car shouldn't make your finances frosty either.

Delivered

Your car shouldn’t make your finances frosty either.

Remember that you do not have to agree to any loan or insurance that is offered to you.

Car yards generally make the most money from you when your loan is inflated and additional insurance is wrapped up in the financing.

I believe that MBI and GAP insurance is lucrative for car yards to sell, which is why so many people offer them (and why so many people buy them).

Auto yards earn a hefty upfront payment by arranging financing and, in some cases, a trail commission on top (meaning every time you make a refund, they get a discount). Add-on insurance policies are, for the most part, navigable like potholes.

Christopher Walsh is the founder of the personal finance resource MoneyHub.co.nz

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