As the name suggests, Gap insurance is meant to fill a gap in already existing insurance coverage. Gap (guaranteed auto protection) insurance is most typically offered on leased vehicles, for situations where the vehicle may be worth less than the total amount owed on the lease if the car is totaled, but gap insurance exists for many other types of loans as well. Without gap insurance, you would be on the hook for the difference between what the auto insurance pays for the totaled vehicle and what is still owed on the lease.
Signs like this are common in the U.K., but there is another kind of GAP car buyers need to be aware of.
Is gap insurance worth it?
Well, that depends on your financial situation. Let’s consider a simple example:
You buy a new car that costs $20,000. You have no money for a down payment and finance the entire cost of the purchase – remember, this is a simple example so I’m ignoring all the other taxes and fees involved. A new car loses as much as 20% of its value the minute you drive it off the lot, so within seconds of leaving the dealership your shiny new car is worth $16,000.
With me so far? Good.
Now, on your way home something terrible happens. You get into an accident and the car is totaled. You now owe the bank $4,000. That’s the difference between the amount you owe the bank ($20,000) and the depreciated value of the car at the time of the accident ($16,000).
Gap insurance would pay the $4,000 difference on top of the $16,000 replacement cost.
In this example, gap insurance would definitely be worth it unless you had $4,000 in savings to pay for the difference on your own.
Is gap insurance a good idea?
In general, gap is a good idea if:
- You have less than 20% to make a down payment.
- You “roll” negative equity from a previous car loan into a new car loan.
- You finance for 60 months or more.
- You finance a vehicle that depreciates very quickly, such as a luxury, highly optioned or one of many domestic vehicles.
- You lease a vehicle.
Most of these cases revolve around financing too much, owing too much and not saving enough. Sadly, the type of people who find themselves in such a situation often have few real options but to purchase gap insurance.
Is gap insurance a scam, a rip-off or even necessary?
Strictly speaking, no. It is not a scam or a rip-off, though some car dealerships who offer it may be. It is also not strictly necessary as you can avoid needing it by doing any, or preferably all , of the following:
- Always pay at least 20% of the purchase price as a down payment
- Don’t buy more than you can afford.
- Have an emergency savings account with enough cash to cover any expenses not paid by your auto insurance.
- Don’t lease a vehicle.
- Always buy slightly used vehicles and never buy new.
By following the above, you will position yourself so that gap insurance would be a needless expense and you might even growth your net worth while you’re at it!
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I am interesting with this blog. I agrre with you idea. Your article is very informative about gap insurance. I am bookmarking it for my future reference.
Interesting, i’d never heard of gap insurance before
thank you for the information, I like this article, I wait for the next article . .......
[...] only cover up to the current value of the auto, which is $5,000 less than you owe. This is where GAP insurance is a good idea because it covers the gap made by the difference in what you owe vs. what the car is [...]