Should You Buy GAP Insurance?
GAP or Guaranteed Auto Protection is an optional insurance policy available in most states from car dealerships, lending institutions, or automobile insurance companies.
Some car buyers don't realize the financial danger that looms during the first few years while financing a car. If you don't have the right insurance coverage and/or GAP insurance you can really do damage to your financial well-being.
In this section I'll explain what GAP insurance is, how it works and how it can protect you from having to pay thousands of dollars if your vehicle becomes a total loss.
Information you'll find in this section:
What is GAP Insurance?
GAP is short for "Guaranteed Auto Protection" or "Guaranteed Asset Protection." GAP insurance is an optional insurance policy available in most states from car dealerships, lending institutions or automobile insurance companies.
GAP covers any additional amount (normally up to $5000) over what an insurance company would pay if your vehicle becomes a total loss. Some GAP policies will even pay your car insurance deductible if your vehicle is deemed a total loss.
Most insurance companies will only pay up to a certain amount if your vehicle is totaled. This amount may be way less than what you actually still owe on the vehicle.
If you owe more than the vehicle's worth you'll still have a deficiency balance with the lender that you will be responsible for. This is where a GAP insurance policy comes in, covering the "GAP" so you don't have to worry about paying anything out of your pocket and you can concentrate on replacing your totaled car.
How Not Having GAP Can Affect You
Every day thousands of vehicles are declared a "total loss" by insurance companies. These vehicles are involved in accidents, stolen or involved in some other kind of catastrophe.
An insurance company is only going to pay the "book value" or actual cash value (ACV) on a total loss vehicle claim. If the individual is fortunate enough to have GAP insurance they will not have to worry about making up the difference to the bank or lender.
The following is just one example of how easy it is to fall into the "GAP."
How not having GAP insurance can hurt you
- You buy a car from a dealer that lists for $26,000. After tax, title and license the total cost you pay is $28,000.
- You put $1,000 down and now owe $27,000.
- You finance the car for a 60 months.
- Your payments are $450/mo at a 0%.
- You acquire comprehensive and collision (full coverage insurance) with a $500 deductible.
- A year into your purchase you have an accident. You walk away without a scratch but your car is declared a total loss by your insurance company.
- The depreciation of a new car is determined by many factors. For this example I'm using 30%.
- The insurance company determines your vehicles actual cash value is $18,200 but you still owe a balance of $21,600.
- This leaves a $3,400 difference between what the insurance company paid and what you still owe the lender.
Someone is still responsible to pay the $3,400 difference plus the $500 deductible in the example above. Can you guess who that someone is? That's right, it's you!
You can see were this can be a huge financial burden if you don't have GAP coverage in place. Some GAP policies that will even pay your insurance deductible for you.
Side note: What if you rolled a couple thousand dollars of negative equity into the new car in the above example? The deficiency amount you're responsible for would be even higher. Everyone is in a different financial situation, GAP insurance is a necessary purchase for some people.
If you decide to not pay the deficiency balance the lender will report your failure to pay to the credit bureau's. This will have a negative effect on your credit history and you will become a higher credit risk and pay higher rates the next time you apply for any credit lines or loans.
Should You Buy GAP Insurance?
I receive a lot of emails asking me, "How do I know if I should buy GAP Insurance?" GAP insurance is not a required purchase and is not a needed option for everyone.
The number one answer to this question is:
If you buy or lease a car and owe more than its actual cash value (ACV). You should look into purchasing GAP Insurance coverage.
There are certain situations where you should purchase GAP insurance and there are times where buying GAP insurance will not benefit you. Here are a few more situations where a GAP policy could be beneficial to you if you ever had an unexpected emergency.
Little or no money down - If you plan on financing your next car and putting very little down or $0 down you will most likely be a candidate for GAP insurance. When you only put a minimum amount down when buying a new car you tend to be upside down for a longer period of time throughout the loan.
If you're looking at an extended term car loan - You may also want to look into GAP coverage if you're looking at extended term financing. By stretching out the financing term of your car loan over 48 months or longer will increase your chances of being upside down in your car loan for a longer period of time also.
Car Buying Tip - A good rule of thumb to avoid a negative equity situation is to put a minimum of a 20% down when buying a new or used car. Decrease the term of the loan to as short as possible. This will save you in finance charges and also increase the chances you will never be in an upside down situation (owe more than the car is worth).
If your leasing a new car with little or no money down - Some manufacturer's and lending institutions will include GAP insurance within their lease terms. If you're leasing a car and putting little or no money down you should absolutely look into purchasing GAP coverage for your vehicle.
Rolling negative equity into another car loan - Although you should never roll negative equity from your current car loan into another car loan it does happen. The problem is the new car your buying now has even more of a GAP amount between what it's actual cash value and what you will owe on it. This situation would be an absolute must for acquiring GAP insurance.
Don't double-dip - Always check with your personal car insurance agent before purchasing a GAP policy from another source. Your current insurance coverage may already include some form of GAP insurance.
To find out if your current insurance coverage has you covered in case you car ends up a total loss. Ask your current insurance agent this. "If my car is a total loss, will my current insurance coverage cover the amount of my loan I still owe over the actual cash value (ACV) of my car?" If he says no, ask your agent if there are any options available to you through their company. If not, you may want to look into other sources for GAP coverage.
Where can you Buy GAP Insurance?
GAP insurance is a necessary item if you lease or buy a car with little or no money down and owe more on it than it's worth. You have only a few options to purchase GAP coverage. Some are more expensive than others.
Your personal car insurance company - You may be able to get some form of GAP insurance through your personal car insurance agent also. An insurance company may not call their coverage GAP insurance but you will want to ask them what kind of insurance do they offer that will cover the amount between the actual cash value (ACV) of your total loss and the remaining balance you owe.
They may tell you depreciation of a vehicle is not an insurable loss. If this is the case you may want to explore purchasing GAP insurance through your loan officer or attempting to purchase it at the car dealership where you buy the car.
The finance company you get your car loan through - GAP insurance is normally available through your finance company. You can ask your loan officer what types of GAP insurance is available to you. Keep in mind that the purchase price of GAP insurance is normally negotiable.
How to Find Free, No-Obligation Car Insurance Quotes Online
The car dealership you buy your car from - You have the option to purchase GAP insurance from a car dealership. I personally do not recommend it though. Car dealers may charge anywhere from $295 to $1,000 for GAP coverage on a single car.
Car Buying Tip - If you're contemplating purchasing GAP from the car dealer. Ask the finance manager to explain to you the terms and conditions of the coverage. If you're interested in purchasing the policy. Tell him that you're willing to pay $50 over the dealer's cost and have him show you his cost sheet. He will have no problem selling you GAP insurance at this price because he gets paid not only on commission but bonus's for how many actual policies he sells.
GAP Coverage may be included when leasing a car - When you lease a new car from some manufacturer's, GAP insurance may be automatically included within the lease terms. If you're leasing a new vehicle. Ask the Finance Manager if GAP insurance is included with your leasing terms.
Always read the terms and conditions listed on the actual GAP contract. You will want to know the pertinent details and the total amount the policy actually covers. Most GAP policies will only cover up to $5000 and some will cover your insurance deductible also.
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My Recommended Auto Insurance Sites
USAA and esurance are the quickest way to see what insurance coverage will cost you on the vehicle you want to buy. These online sites will provide you with free, no-obligation quotes and the prices are normally pretty good. You can also use these quotes to negotiate an even better price with a dealership.
Share Your Tips - If you have any tips about GAP insurance that will help other car buyers save money. Please tell us about it in the comments below, so we can share it with everyone.
Continue to our section on Credit Life and Disability Insurance Explained.