What Is GAP Insurance and Should You Pay for It When Buying a Car?
Buying a car can be a stressful situation. This is especially true when it comes to financing a car. With so many extended warranties, protection plans, coverage, and, of course, GAP insurance being offered, it’s hard to decide what is necessary and what isn’t.
What exactly is GAP insurance?
According to Kelly Blue Book, GAP is an acronym for Guaranteed Asset Protection. Conveniently, it also helps span the gap between what you owe and what your car is worth in the event of an insurance claim. So, if your car is totaled or stolen and your insurance writes you a check for $15,000, but you still owe $20,000, GAP insurance will ensure you don’t have to pay the extra $5,000 out of pocket.
Effectively, it protects a car’s buyer against taking a loss due to a vehicle’s depreciation. It can be a great peace of mind asset when buying a car with a loan. However, buying it from the dealer at the time of the car’s purchase isn’t always the best move. Let’s get into when you do and don’t need GAP insurance and the best way to get it.
When do I need GAP Insurance?
Right off the bat, if you own your car outright or are paying full price for the vehicle and are not getting it financed, you don’t need GAP insurance. Otherwise, there’s a good chance you do.
When buying a car, you should consider adding a GAP policy when you aren’t putting 20% or more down at the time of purchase. KBB says that a new car’s value drops 20% instantly the moment it leaves the lot. So, if you are leaving with less than a 20% down payment, you’re rolling off the lot with an upside-down car loan.
Another instance in which one should add this coverage is in the case of drivers who drive a lot. If you’ve got a long commute every day, frequently go on road trips, or are a delivery driver, you should consider it. There’s a great chance that the mileage you put on a car will cause the vehicle’s depreciation to outrun your payments and put you in a situation where you’re upside-down in your car loan, as well.
Other instances in which one should consider adding this coverage is when you have a very long loan term, like 60 or 72-month terms. Chances are, your payments will not cover the depreciation. Additionally, consider adding it when you buy a vehicle notorious for rapid depreciation.
Shop around for the best-priced policy
Much like shopping for a car and standard insurance, it’s important to weigh your options when it comes to searching for GAP coverage.
KBB states that traditional insurers may offer GAP insurance for as low as $20 a year. However, dealerships or financial institutions offering it as part of a package with your loan may charge upwards of $700 a year. So, be diligent with your pricing research and don’t get too antsy. If you’ve already signed up for coverage with a recent vehicle purchase, there’s a good chance you can cancel your GAP policy for a refund.
KBB also notes that it’s worth looking into local laws, as some states allow vehicle owners to claim diminished value of their car after an accident. So, be sure to check with state laws to see if you even need GAP coverage!
Overall, GAP coverage can be highly beneficial in most cases when financing a vehicle. That doesn’t mean, though, that a dealership isn’t going to try to sell you coverage at a considerable premium. So, while it’s all a bit overwhelming, be sure to do your homework before you sign anything!