Is Gap Insurance Worth It?

FT Contributor  | 

Whether you buy a brand-new car or a used car, it’s a huge financial investment. In most cases, your vehicle is one of the most expensive purchases you’ll make aside from your home. The difference between these two big investments is that as soon as you drive your car off the dealership lot, it instantly begins depreciating in value. Depreciation is a problem if you have a loan or if you’re leasing your car. In no time at all, you may find yourself owing the lender more than the car is worth.

If you only have regular auto insurance on your vehicle, it may not be enough to provide you with the money you need for to pay off your loan and buy a replacement car if your vehicle is deemed totaled or stolen. Guaranteed auto protection, or gap insurance, is an additional type of insurance you can buy for your new or used vehicle.

When you claim a total loss or stolen vehicle to your insurance company, they provide you with the actual cash value of the car, or the value of the car after depreciation is taken into consideration. Gap insurance covers the gap between the car’s actual cash value and the car loan balance you carry on the vehicle at the time of loss. By learning more about gap insurance and when it’s beneficial, you can ensure your four-wheeled investment is financially protected.

How Does Gap Insurance Work?

If your vehicle is totaled or stolen, your auto insurance carrier examines your vehicle and determines its actual cash value. When your claim is processed, the insurance company provides you with payment for the vehicle’s actual cash value through your comprehensive or collision insurance coverage.

If your car has depreciated since you bought it, you may have a gap between its actual cash value and the loan balance you still owe. Not only are you out a car, you’re also out the money your insurance company provided you, and you’re still responsible for paying off your car loan. If you have gap insurance on your vehicle, getting into this bind is a lot less stressful. Your gap insurance provides you with the money you owe your lender after you’ve already paid the actual cash value of your vehicle.

For example, say you bought a used car with a loan for $20,000. Two years later, you were in an accident and the car was totaled. At the time of the accident, it was only worth $12,000, so that’s all your car insurance paid you. However, you still owe $15,000 on the loan. Your gap insurance carrier provides you with the $3,000 you need to pay your lender so you can pay off your loan.

How Much Does Gap Insurance Cost?

The cost for gap insurance varies, depending on where you purchase it. If you opt to purchase gap insurance through a lender, you may pay more than if you purchase it through an auto insurance company. Your auto insurance carrier offers several optional coverages you can add to your current policy, including rental car coverage and gap insurance. It’s important to get several quotes from auto insurance companies when shopping for insurance.

In most cases, the dealership or lender will ask you to pay a flat fee for gap insurance coverage for the life of the loan, which can be several hundred dollars. However, most auto insurance companies offer gap insurance as a small percentage of your collision and comprehensive coverage premiums, usually 5% to 6%. Your gap insurance cost is also affected by the loan amount and type of car you purchase.

When to Consider Gap Insurance

Not everyone who purchases a car needs to buy gap insurance. However, there are specific instances when gap insurance is beneficial, including:

  • If you owe more on your car loan than your vehicle is worth: If your vehicle is totaled or stolen, you’re responsible for paying off your car loan if you don’t have gap insurance. Without this insurance, you’ll be stuck without a vehicle and with the loan balance.
  • If your car loan requires gap insurance: Some lenders require you to purchase gap insurance. Review your car loan terms to learn if your lender requires gap insurance and if so, take the time to shop around for the best premium.
  • If your car lease agreement requires gap insurance: While you don’t have a loan on your car, you may be required to buy gap insurance for a leased vehicle. Review your lease terms to learn if gap insurance is required and if so, add it to your car insurance policy.

Is Gap Insurance Worth It When Buying a New or Used Car?

The decision to buy gap insurance depends on your specific situation. If you have a good credit score, you offered a hefty down payment when buying your car, and agreed to a loan with beneficial terms, you may not feel gap insurance is necessary.

When your loan term is 48 months or longer or you only provided a small down payment when purchasing your car, consider buying gap insurance. It’s also an important purchase if you drive your vehicle a lot since increased mileage depreciates your car’s value quickly.

If you think you can continue paying your loan at the same rate that your car depreciates, this type of insurance may not be necessary. However, it’s important to keep in mind that a new car begins to depreciate as soon as it’s driven off the lot, so it can be nearly impossible to keep up with this depreciation throughout your loan term.

The Final Word on Gap Insurance

Gap insurance isn’t necessary for every driver. However, going without this auto insurance can be detrimental if your vehicle is stolen or totaled and you owe more on your loan than your car is worth. Without gap insurance coverage, you’re stuck paying off your loan even after your insurance company has paid your claim.

When deciding if you should purchase gap insurance, consider the value of your vehicle and your loan terms. Think about the financial situation you would be in if your vehicle was totaled or stolen. In many cases, it may be worth it to shop around with different auto insurance companies for the best and most affordable gap insurance coverage to protect your vehicle purchase.


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