If you’re buying a new car and looking at insurance policies, GAP insurance can seem like a scam or an unnecessary expense. This is an unfortunate perception. It may not be right for some, but this type of insurance can actually be very helpful for certain drivers. In this blog we’ll look at exactly what GAP insurance does and who may need it.
How Does GAP Insurance Work?
If your vehicle experiences a total loss after an accident—there’s no repairing it—GAP insurance pays the difference between what the car is actually worth and what you owe on the vehicle. Your normal insurance policy just pays the current value of the vehicle to the lender, but you may owe quite a bit more.
As soon as you drive off the lot, your car depreciates around 10% as it is now considered a used car. It will be down 20% by the end of the year and 30% in the first three years (this is a reason why many people choose to buy used cars). If you have a long term loan and didn’t put down a large down payment, you’ll probably find yourself “upside down” where you owe more than what the car is actually worth.
That’s fine if you plan on owning the car, but can be dangerous for finances if the car gets totaled or you need to sell it. Say you bought a car for $25,000. By the end of the year, it’s worth $20,000 and gets totaled. You wind up still owing the lender more than $4000 even when you no longer have any use of the car.
Who Should Get GAP Insurance?
So who should turn to GAP insurance as an option? If you took out a long-term loan for 60+ months it’s a good idea, especially if you put less than 20% down when you bought the vehicle. If you brought any negative equity from your last car, then you’ll also want it.
Another reason is if your car will depreciate in value faster than normal. Some types of models depreciate faster than others. And if you’re the kind of person who has to drive more than the average of 15,000 miles a year, it’s definitely in your best interest.
The one thing to keep in mind, though, is to remove the GAP insurance at a time when you have paid back the car or you don’t owe more than the car is worth. Then it’s just costing you money for no reason.
January 10, 2014 by Jamie Rettig