Gap Insurance – Is Gap Insurance A Good Deal?
What is Auto Gap Insurance?
If you are financing or leasing a new (or sometimes used) vehicle, you may be encouraged to purchase a product called car gap insurance. Sometimes you financing company may even require it because they do not think the car’s value is equal to the loan value. This happens to lots of people, especially those who choose longer auto loan payoff times, small down payments, and also because people tend to finance things like sales tax, warranties, etc.
What it does is it pays off the difference between the value of your vehicle (in the case when an insurer declares it a total loss) and the amount you owe on your loan. Sometimes there is a huge “GAP”, and this extra coverage can come in very handy indeed.
Consider that one common rule of thumb is that a brand new car depreciates about 20% the minute you drive it off the lot. So let us say you financed a $25,000 vehicle. You drive it off the lot, and then you wreck it the next day. Your insurer may only want to pay you $20,000 because they will insist that is the book value of your pre-owned car! You are still repsonsible for the exta $5,000 that you still owe your finance company.
This may be an extreme example, but remember that you may have also financed things like sales taxes, a warranty, or the gap coverage itself! And sometimes, because you have extended your payments over a few years, you can find yourself upside down on your auto loan after years of payments.
Now you actually can cancel your warrenty and gap insurance for a credit, but many people would not even know they could do that if they were not told by the GAP insurance company!
Where can you purchase this coverage? It does not come with your regular policy. Some auto insurance companies may offer it as an additional rider if you ask. Many people just purchase the policy at the dealer. Others shop for it online because they think that can get a better deal.
Do You Need Gap Insurance?
When you are buying any insurance, you are choosing to protect yourself from a gamble. If you owe less than your auto’s value, you do not need it. If you are confident you can pay the difference with no problem, you may not want to spend the extra money either. But if you think it would hurt your finances to have to pay off a car you cannot drive, you may want to consider GAP insurance!
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