Free Car Payment Insurance: What's The Catch?

When you're unsure about buying a new car because the job market looks shaky and your current job doesn't feel stable, is there any reason why you should take the new-car-payment plunge? One reason might be car payment protection plans that are offered for free by car makers such as GM (NYSE:GM), Hyundai (OTC:HYMLF) and Ford (NYSE:F).

How Does It Work?
When you lose your job in a way in which you would qualify for your state's unemployment compensation program, your payments will be made for you up to a set amount and for a set number of months. However, if your pay is reduced and you can't afford the payment anymore, you're out of luck with this program.

Just like a warranty, the payment protection has to occur within a specified time period. For instance, the dealership may make these payments for six months or more if you lose your job within one or two years. The exact terms vary widely and you will want a copy of the terms in writing before you purchase your new vehicle.

When Is It Available?
The dates of these payment plans vary, but the protection plans gained popularity in spring 2009. However, since it is an incentive to buy a car, it could disappear and reappear at any time. Thus, you should always ask car dealers if this feature is currently being offered.

How Much Does It Cost?
It's a free incentive in addition to rebates and other incentives. You will not have to pay more for your car to get this service.

Is a Payment Protection Plan Reason Enough to Buy a New Car?
The plan may be reason enough to buy a new car assuming the following:

  1. You were going to buy one anyway
  2. You haven't lost your job already
  3. You are comfortable that if you do lose your job, you can find a new job within the set number of months given to you before your payments must resume.

Caps on Payment Amounts
Each car company that offers this deal may offer a different payment cap. Anything beyond that amount you would still have to pay while the insurance is covering your payment. For instance, let's say you buy a $30,000 car that you are going to pay off in five years at an interest rate of 6.5%: your monthly payment would be $587. If your payment insurance covered up to $500 for each payment, you would still have to pay the remaining $87 per month while you are unemployed.

Alternatives and Additional Cautions
Car payment insurance - when available - is a nice safety net, but it's not a reason to get a car that is barely within your budget now. Don't get the highest priced car you can afford. Get a car that you could still afford even if other situations not covered by insurance were to occur, such as a pay cut or unplanned medical expenses. There are also other lower cost alternatives to buying a brand new vehicle.

Here are some alternatives to buying a new car for you to consider:

  • Low- mileage used cars. If you can, consider saving money by buying a used car with less than 10,000 miles. Make sure you compare this cost with the final sales price after rebates and other incentives offered in a new car.
  • Keeping the car you have. If the car you currently have is a few years old and in good shape, find out how much your car will cost you in repairs over the next couple of years by asking your mechanic.
  • Create your own payment protection plan. Even if your shiny new car comes with payment protection, it's a good idea to have a few months of payments saved up in case your finances get tighter for any reason. Even if you decide to get a new car because of a payment protection plan or other incentive, start putting extra money in your savings in case you have trouble making your car payments at a later date. If you can't do it because the new car payments will leave you cash-strapped, ask about less expensive models.

Concentrate on the Best Deal
You are going to have this vehicle well beyond any layoff period, so the interest rate and the sales price are of at least equal importance as the payment protection plan. Shop around for the best deal in addition to the best payment insurance plan. After all, will you really care if your payment is protected if you bought a car that is overpriced and has payments you can't afford now?

Different Names for the Same Thing
Every car maker that offers these programs is going to call it something different. Therefore, if you really want to know if a particular dealer has this program explain to them that you looking for a plan that helps with payments if you lose your job.

The Bottom Line
Car payment protection plans can feel like the cure to stabilize your car buying woes. But it is never a good idea to buy a car you can't afford now and in the foreseeable future. If your job doesn't feel stable and you want or need a new car, buy a car that costs less than the maximum you can afford. The worst and best that can happen is that when your income begins to rise again, you can trade the car you bought for the one you've dreamed about.