GAP Insurance: What is it and Do You Need It?
After you have picked out the new or used vehicle of your dreams and you are ready to sign the papers, you will most likely be ushered into the dealership's finance and insurance office. There, you will probably be presented with the option of adding something called GAP insurance to your monthly payment, usually for only a few dollars per month extra. So what exactly is GAP insurance, and should you buy it?
GAP is often used as an acronym: Guaranteed Asset Protection. This type of insurance promises to make up the difference between the amount you owe on the vehicle and the amount it is actually worth (the gap), in the event of a loss due to theft or an accident.
As most of you reading this probably know, your vehicle will lose value the moment you drive it off the lot, especially in the case of a new vehicle. In fact, in most new vehicle finance scenarios, you will likely owe more than the vehicle is worth for many years. In the event of a total vehicle loss, most insurance policies will only pay the current value of the vehicle. Since the current value is likely less than the amount owed, the difference becomes the responsibility of the vehicle owner.
GAP is often used as an acronym: Guaranteed Asset Protection. This type of insurance promises to make up the difference between the amount you owe on the vehicle and the amount it is actually worth (the gap), in the event of a loss due to theft or an accident.
As most of you reading this probably know, your vehicle will lose value the moment you drive it off the lot, especially in the case of a new vehicle. In fact, in most new vehicle finance scenarios, you will likely owe more than the vehicle is worth for many years. In the event of a total vehicle loss, most insurance policies will only pay the current value of the vehicle. Since the current value is likely less than the amount owed, the difference becomes the responsibility of the vehicle owner.
This is where GAP insurance comes into play. GAP insurance pays the difference between what you actually owe and what the vehicle is worth.
So should everyone get GAP insurance? That depends on your situation.
If you are leasing, every manufacturer's captive finance company (along with most of the other major independent leasing companies) include GAP insurance in the lease. They want to be protected, since it is their vehicle, and not yours. However, it is always a good idea to read your lease contract to make sure GAP is included. The coverage is usually listed on the back side of the lease contract
What about if you are financing? For a new vehicle, I would seriously consider it. The added cost is minimal and it gives you piece of mind in the event that something happens. Exceptions would be if you have put a large percentage down (40% or more) in the form of cash or trade-in. With that much down, you will likely not be upside-down, or if you are, not for very long.
For the used vehicle buyer, it becomes an even bigger value question. Since used vehicles loose value at a slower rate, relative to newer vehicles, you may not be as upside-down for as long of of a time. However, if you are financing for extended terms (60 months or longer) or have a high interest rate, then it might be a good idea to purchase GAP insurance.
The next question becomes should you buy it from the dealer or from your own insurance company? Generally speaking, the GAP purchased through the dealer can be more expensive than GAP you might purchase elsewhere. However, you do have the luxury of working into your car payment, so it will represent a smaller impact on your monthly budget than having to pay for it all at once.
Then again, buying GAP from your own insurance company or from another insurer is not overly expensive either. For example, one company charges $399 for GAP and it covers the Gap and up to $500 of YOUR collision deductible if your vehicle is totaled for any reason throughout the life of your loan up to 84 months. Your own car insurance company can also offer you a GAP policy, or they might have a GAP option that can be added to your vehicle insurance policy.
The lesson here is to shop around. Just like you shop different dealers for the best vehicle price, you should shop around for the best GAP insurance price. If you know the price ahead of time, you will have a better idea if the GAP price the dealer is offering you is a good deal or not.
- Posted by
- Lee Scott March 4, 2008, 5:56 AM
- Permalink
- Categories:
- Auto Leasing, Car Buying, Car Loans and Financing
It can be really, really useful. When some jackass street racer lost control and totalled my sister's 2 month old Jetta the GAP was a lifesaver.
I have GAP on my ES350, paying $10 per month and can be cancelled at any time.
Another factor is to treat your trade in as a or part of a down payment. You can go online and easily find the value of your car (new or used) and even figure out how much it will depreciate by driving off of the lot. Then you can use one of many online calculators to figure out how your payments work, and some estimates of future depriciation, to see how long you will be upside down.
When I bought my 2004 Mustang GT (in 2006), I traded in my old 1999 Chevy Blazer Sport (2-door). I started the deal right-side up, and stayed that way until it was lost in an accident a few months ago.
If you start out a deal right-side up, you should be able to stay that way unless you have an enormously bad financing (high interest for a very long period of time)
Back in 2004, my parents and me were in a car crash in our Honda Cr-V. A drunk driver hit us, and totaled our car. We were fine, but our dealership ended up telling us we owed more on the car than it is worth, because they never told us about GAP insurance. The whole thing was an awful experience, and we ended up buying a 2004 Accord, and paying an arm-and-a-leg for it. I guess we know better now..
I agree with heffling. if you get a fairly good down payment, and a good price. I wouldn't worry much about it.
I dont think you need to go as far as 40%, I would say at least 20% with fair finance terms should make you good.
I thought that photo looked familiar. I hope Kelly doesn't see it. :(
Let's not tell her. ;)
agree with heffling. if you get a fairly good down payment, and a good price. I wouldn't worry much about it.
I dont think you need to go as far as 40%, I would say at least 20% with fair finance terms should make you good.
You are wrong 100%!!! Did you no that value is falling hard. A 2006 Yukon was worth 24,000. In July and in Aug. it was worth 19,000. So 40% is on the button. Most people have to finance for a longer time now to afford the payments.
For example, one company charges $399 for GAP and it covers the Gap and up to $500 of YOUR collision deductible if your vehicle is totaled for any reason throughout the life of your loan up to 84 months. Your own car insurance company can also offer you a GAP policy, or they might have a GAP option that can be added to your vehicle insurance policy.
The lesson here is to shop around. Just like you shop different dealers for the best vehicle price, you should shop around for the best GAP insurance price. If you know the price ahead of time, you will have a better idea if the GAP price the dealer is offering you is a good deal or not.
Why have your own insurance company compete over your loss. Your agent’s job is to help you out. Do you think they want to compete over there own company? Also read what gap you will buy. Some are for only 60 term and pays up to 120% of trade or retail. There are many gap companies that just sell you something and it is worth less for you. So what I am saying is let a dealer sell you their gap. Show you the difference. You should please take a look at this. Dealer should sell you one that pays (MSRP) or NADA retail value of more than $100,000. Or amount financed exceeds $100.000. It should be 150% of MSRP/Retail and 84 months. Yes you might pay more but you will not have to pay in the end. It will change you payment $5-$10 a month. We work hard and like nice things so why be cheap now! A good price is not always a good deal.
New or Used gap is they way to go!!!!!!!!!!!!!!!!!!!!!!!!!!!!