What is GAP Insurance? Why is it Important?

gap insuranceMany car buyers (and leasers) have never heard of GAP insurance. But it should be an important consideration in any car buying or leasing process.

What is gap insurance? Why would you need it?

Let’s say you bought a new car and paid $30,000. You made $2000 down payment and financed the remaining $28,000 with an auto loan, for 60 months. With five years to pay, your monthly payments are relatively low but those payments don’t keep up with the rapid depeciation in value that your car experiences.

So, for most of your payment term you are “upside down,” which means at any point in time, your loan balance is more than the current value of your car.

You then have an accident in which your car is totaled, or your car is stolen. Your insurance, or the at-fault party’s insurance, will only pay the current “replacement” value of the car, not what is still owed on your loan. The difference is called the “gap.” Without separate GAP insurance, you are responsible for that difference, which could be thousands of dollars.

Many people in this situation are shocked to learn that their insurance doesn’t pay the full amount of the loan payoff. Some also think, if the accident was caused by someone else, that the other person is responsible for the loan payoff.  Not true.

GAP insurance was not something needed in the “old days” of car buying. Buyers usually made a healthy down payment — at least 20% — and paid off their loans in no more than 3 years. They also didn’t roll over balances on trade-in vehicles as is common today.

If you plan to buy a car with little or no down payment, get a long-term loan (60 months or more), drive lots of miles each year (which increases value depreciation), and roll over negative equity from a trade-in vehicle, then you will almost certainly be in a situation in which you will need GAP insurance.

Are you in that situation now? Call your bank and get your current loan balance. Then go to Kelley Blue Book (www.kbb.com) and find the current value of your vehicle. Do you owe more than your vehicle is worth?

How and where do you buy GAP insurance?

If you plan to lease your car, nearly all lease companies provide built-in GAP coverage at no additional cost.

If you plan to buy, and suspect that you’ll need GAP insurance, you can find it being offered from several different sources. First, your dealer may offer it, although the price could be higher than you might find it elsewhere. Your auto insurance company may offer it. Otherwise, do a web search and you’ll find a number of companies that offer it.

GAP insurance is not very expensive and it is well worth having to avoid financial disaster if your car is stolen or totaled in an accident.

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