Gap Insurance

GAP INSURANCE


When you are buying a new or used vehicle, you may be asked whether or not you’d like to buy “GAP Insurance.” You may not even know what “gap” is. In that case, this article is for you. Even if you know what gap insurance is and have purchased it in the past, you may have paid too much for it, and this article is also for you.

WHAT IS DOES GAP EVEN MEAN?GAP.png

“GAP” stands for Guaranteed Auto Protection.

The “gap” occurs when your car is totaled or stolen, and you owe more on the car loan than your insurance company is willing to pay (i.e. you owe more on the loan than your car is worth). For example, let’s say you buy a used car with a loan of $40,000. Unfortunately, you are involved in a serious accident months later that totals the car, and you still owe around $38,000 on your car loan. But then your insurance company only values the car at $33,000 and that is all they will pay.

OKAY. BUT WHEN WOULD I EVER NEED IT?

In situations like the example above, GAP insurance can cover the difference between the value of your vehicle and the balance on your loan. Without GAP insurance, you would have to foot the bill yourself in these situations.

CAN I JUST BUY GAP EACH TIME I BUY A CAR?

The nightmare scenario just discussed may tempt many buyers into purchasing GAP, but this type of protection is not right for everyone and not right for every car purchase..

GAP insurance is a smart move only in a few distinct situations. For one, if you are leasing your car, you may want to purchase GAP insurance.

Also, GAP may make sense if you made a low down payment on your vehicle, such as less than 20 percent of the purchase price. Along the same lines, if you have a long payoff period, such as more than four years, GAP insurance may be a good idea.

Finally, GAP may be a wise choice if you are buying a car that depreciates quickly, such as sports cars, luxury cars, and cars with high mileage. Some specific examples of fast-depreciating cars include: Hyundai Genesis, Chevrolet Impala, Cadillac CTS, GMC Yukon XL, Mercedes S-Class, Mini Cooper, and Jaguar XK.

In the used car context, depreciation is not as large a concern as if you were buying new, but it may still come into play if you are buying a vehicle with above-average mileage or if you put down less than 20 percent of the purchase price or have a loan that is longer than four years.

IS IT SMART TO BUY GAP INSURANCE FROM THE DEALER?

Probably not. Your dealership most likely will offer to sell you GAP at the time of purchase, but you should NOT buy GAP from the dealer. Dealerships generally will charge around $600 or more for GAP, which is up to FOUR TIMES what an independent insurance company will charge you. This is because what the dealership is offering you technically isn’t really “insurance,” just a debt-cancellation clause. This just means that you and the bank agree in advance that you won’t have to pay any difference between the value of your car and the remaining balance on your loan. You can pay a hefty price for that or you can get real GAP insurance.

Look at the rates offered by different insurance companies. Most companies will charge around 5% of the cost of your annual premium for comprehensive and collision auto insurance. That can save you a considerable amount.

IS GAP A GOOD DEAL? MAYBE.

To recap:

• GAP insurance covers you in the event you owe more on your totaled or stolen car than the car is actually worth.
• GAP insurance can make sense if you are putting down less than 20 percent, your loan is longer than 4 years, or you are buying a high-mileage vehicle.
• Buy GAP from an independent insurance company; NOT from the dealership that sold you the car.

In the right situation, GAP insurance can give you peace of mind and needed protection. In the wrong situation, you could be throwing your money away.

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