Do You Need Gap Insurance?

When buying a new car, you may want to consider purchasing gap insurance. If your vehicle is stolen or totaled, gap insurance pays the difference between the actual cash value of the car and the current outstanding balance on your loan or lease. You can purchase gap insurance from most private insurers or the car dealership. Not everyone needs gap insurance, though. See who should and shouldn’t buy this product.

How It Works

If your auto insurance deems your vehicle to be a total loss, you can lose money even if you have comprehensive coverage. Because your car depreciates after you buy it, your insurer will only pay you what it determines the value to be. This fact can be especially problematic if you are making car payments with a small down payment.

On average, a vehicle depreciates 20 percent in value every year. Let’s say you buy a minivan for $30,000 and make a $500 down payment. You make $250 payments every month. A year after buying the van, you total it in an accident. Your insurance company determines the vehicle is worth $24,000. You’ve made $3,500 in combined payments thus far, leaving you with $26,500 left to pay. In this example, gap insurance covers the $2,500 difference between what your comprehensive coverage pays and what you still owe on the minivan.

Who Should Buy Gap Insurance

Gap insurance is often inexpensive, and you can sometimes purchase it as an endorsement on your auto insurance policy. You should buy gap insurance if:

  • Your vehicle depreciates quickly. If it drops in value quickly or is totaled, you won’t see as big of a payout from your insurer.
  • You plan to drive a lot of miles in your vehicle. High mileage means rapid depreciation.
  • You made a small down payment or are making small monthly payments. The lower your payments, the greater the gap between what you owe and what your insurer will pay you.
  • You traded in a vehicle and added the amount you owe on it to your new vehicle’s loan. Unless you paid off that loan up front, you’ve just made the loan amount even larger.
  • You are low on savings and would not have the extra money to pay the difference between what your collision insurance covers and the loan amount you have left.
Who Shouldn’t Buy Gap Insurance

Gap insurance may cost more than it’s worth for some people. It is not in your best interest to buy gap insurance if:

  • You paid the full amount for the vehicle and did not have a loan or lease.
  • You do not expect to owe more than your vehicle is worth during your loan or lease.
  • Your vehicle is less than 12 months old, and you are its first owner. Many comprehensive insurance policies cover the replacement of a brand new vehicle in its first 12 months. However, not all do, so it’s important to read the policy terms.
  • You agree with your loan or lease provider that covers you for the difference between the actual cash value of your vehicle and how much you owe on it.

If you decide to purchase gap insurance, try shopping around. Often, you can find a better price and product outside of the car dealership. Make sure you find a product that will cover you for all types of situations, such as theft and natural disasters. Then, you’ll be ready to hit the road without fear of ending up on the wrong side of your auto loan.

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