Is GAP Insurance Worth It?
Full coverage auto insurance is required when financing or leasing a car, but what about GAP insurance? GAP stands for guaranteed asset protection, and it may be a good idea to consider it, especially when it’s cheap.
Is GAP Coverage Worth It?
GAP insurance coverage is completely optional, and it is rather inexpensive. GAP coverage typically costs around $ 20 to $ 40 for the whole year, and maybe even less. The overall cost depends on your vehicle, but that’s pretty much what you can expect when shopping.
GAP insurance covers the “gap” between what you owe and the value of your car. If something should happen to your vehicle, your auto insurance only pays for the value of your car at the time of the incident (such as theft or an accident). If you were to have an accident or your stolen vehicle is never recovered and your car’s value is less than what you owe on your car loan (called negative equity), your GAP insurance comes in to cover this deficit. .
You total your vehicle worth $ 10,000. However, you owe $ 13,000 on your loan. GAP insurance pays that $ 3,000 so you don’t have to, and your full coverage auto insurance pays for the value of your car.
Compare the cost of paying around $ 20 to $ 40 a year to having to shell out hundreds or thousands of negative equity. Even if you finance your vehicle for 84 months, the maximum you are likely to pay over the life of your auto loan is probably about $ 250 in total for GAP insurance. The exact amount varies, but this peace of mind is well worth the money for many borrowers.
What GAP Insurance Does Not Cover
GAP insurance is not intended for people who own their car. GAP coverage ensures that your entire loan or rental balance is paid if your vehicle is stolen or totaled. This is extremely useful for borrowers who take out a large car loan or for renters, but it does not help those who already own their car.
GAP insurance does not cover vehicle payments in the event of financial hardship, unemployment, or death. It also cannot pay the interest charges accrued on your loan – only the principal. If you have accumulated a lot of money on your car loan due to a high interest rate, GAP insurance does not cover these interest charges.
If your high interest rate is the main reason you worry about negative equity, GAP insurance doesn’t alleviate those concerns. Refinancing your auto loan later may be a better idea if you are worried about paying a lot of money for interest charges if something does happen.
When does GAP insurance make sense?
There are four main scenarios where GAP insurance makes the most sense:
- GAP insurance is generally worth the money for borrowers who finance or lease new cars. Since new vehicles lose value very quickly during the first few years of ownership – typically around 20% in the first year alone – GAP insurance can be useful if something does happen.
- Another GAP coverage scenario makes sense when you are paying little or no money on your car. Down payments reduce the chances of your vehicle being in negative equity, and with a small down payment or none at all, GAP insurance can keep you from paying out of pocket for your negative equity.
- If you drive a lot and really rely on the mileage on all of your cars, then GAP insurance may be worth it as well. Since mileage can really quickly depreciate a vehicle’s value, you might find yourself owing more on the car than it is worth if you drive a lot.
- Another situation where GAP insurance may be worth your while is if you don’t have a big savings. If your vehicle is stolen and you have negative equity, would you be able to cover that deficit to the lender / lessor if the car is never recovered? For those who do not have the disposable income to cover large and unforeseen expenses, GAP insurance might be worth it.
When can I take out GAP insurance?
Most dealerships offer GAP coverage while you complete the car buying process with the finance and insurance (F&I) manager. Most of the time, the F&I manager can factor the cost of the coverage into your car loan.
You can also check with the auto insurer. Many, if not most, offer their own GAP insurance policies that you can add to your full coverage policy. Lenders can also offer their own GAP coverage. It doesn’t hurt to compare the prices of the dealership, your auto insurance, and your lender if you want to find the best price for your situation.
Also keep in mind that not all insurers can offer GAP insurance for used vehicles. Some may consider a slightly used or fairly new car, but most prefer new vehicles or rented cars.
Looking for an auto loan?
Finding the right vehicle, comparing insurance policies, and considering optional coverage are just a few parts of the car buying process. For many borrowers, finding a lender to help them with bad credit is the hardest part of buying a vehicle.
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