Let’s play “what if” together. Say you purchase a brand-new car, and a week later, with that distinct new car fragrance still filling your nose, you are involved in a terrible accident and the car is totaled. (We know you’re a great driver and nothing like that would ever happen to you, but just go with it.) Everyone is aware that new cars begin to lose value the moment they are driven off the lot; according to some estimates, this loss of value can range from 9 to 11 percent in the first day. Therefore, if you borrowed money to pay for your now-totaled car, it’s likely that you owe more than the vehicle is actually worth.
In this case, if the automobile owner didn’t have GAP insurance, they would have to keep making payments on a totaled vehicle in order to settle the debt. What nonsense! GAP insurance can help in this situation. GAP insurance pays the gap between a car owner’s debt and the car’s actual value. In rare circumstances, it also pays the usual auto insurance deductibles. GAP insurance steps in and clears the slate, saving the borrower from having to continue making payments on a car that is in the junkyard.
Why is GAP capitalized? Actually, it is an abbreviation for “Guaranteed Auto Protection.” GAP insurance is guaranteed to pay your debts in the event of a total loss, freeing you up to start looking for a new car, bike, scooter, or whatever you decide to use as your replacement vehicle.
Not everyone should purchase GAP insurance, though. In reality, there are very few situations (such as the one described above) where having GAP insurance would be beneficial. Continue reading for a more thorough explanation of who needs GAP insurance and who doesn’t, as well as how much it might ultimately cost you.
When is GAP insurance necessary?
There are a few circumstances in which it makes sense to protect your car with GAP insurance, but there are many more in which it does not. So be sure to thoroughly assess if your car needs to be protected before rushing out and including it in your current auto insurance policy.
The easiest situation in which you should buy GAP insurance is one in which you have negative equity on your car. Why does that matter? In this case, the term “upside down” merely refers to the fact that you owe more money on your car than it is actually worth. It does not indicate that you have rolled the car over and are waiting for help to right the ship. If you didn’t buy the car outright, you can be in the hole financially for the first few months, or even longer if you skip one or more payments.
There’s a considerable likelihood that the dealership will insist on GAP insurance if you’re leasing a car. Why? Because the lease insurance often only covers the car’s cash worth, similar to an owner-driven vehicle. Furthermore, the cash worth of a new car that you are leasing is probably less than what is still owing on it (as it is for most leaseholders). Unless you have GAP insurance, you will be responsible for the difference between the car’s true market value and the amount still owed on the lease if you wreck a rented vehicle. Having GAP insurance can spare you the bother of continuing to make payments on a car that has been reduced to scrap metal, just like with a non-leased vehicle.
Okay, so there are a few instances where GAP insurance is necessary, such as when you are upside down on your car loan or when you are leasing, but there are many more instances where it is unnecessary to carry GAP insurance. You are not only not required to get GAP insurance in almost every other situation, but in many circumstances, it would also not make any sense at all. You obviously don’t need GAP insurance if you have a beat-up 1979 El Camino that you paid your brother-in-law $500 for, but in a similar vein, you also don’t need it if you bought a new car at the dealership with a sizable down payment.
What Happens If Your Vehicle Is Totaled
All of us have heard of “totaled” autos, but what does that actually mean? When the damage is so severe that it would cost more to restore the car than it is worth (or when the damage is greater than 65 or 70 percent of the market value of the car), the damage is said to be a total loss. Asking your insurance agent is the best method to find out what a total loss for your car will entail because the specifics can differ from one insurance company to another.
GAP insurance: Is it worth the price?
The decision to purchase insurance, as with any sort of insurance, is largely based on the thing being insured and its value, but it also boils down to financial considerations. GAP insurance can save you a ton of money for a relatively little portion of the cost of your auto insurance. If your current collision and comprehensive prices are, let’s say, $400 per year, GAP insurance will only increase your overall insurance expenses by $20 on average (5–6% of your annual insurance premium).
There are several options available to you if you decide that you want GAP insurance. When purchasing a new car from a dealer, GAP insurance is frequently available there or through an insurance company. GAP insurance is not offered by all insurance providers, and for many of those that do, you must already have collision and comprehensive coverage. If you purchase GAP insurance through your insurance company rather than the dealership, it will normally be less expensive.
There are a few more things to think about: Only purchase GAP insurance if you actually need it. It should go without saying, but once you commit to a recurrent payment, such as insurance, it might be simple to keep paying without reviewing whether you still require the service. It only makes sense for automobile owners to have GAP insurance while they are still making loan payments, and even then, they should probably only have it while they are still in the negative on the car. So remember to cancel your GAP insurance if you sell the automobile or finish paying off the loan sooner than you anticipated! Additionally, you should be eligible for at least a partial return if you purchased your GAP insurance in full up front and decide to sell your car or refinance your loan.
How Much Your Car Really Costs
Few investments are as certain to lose money as new vehicles, despite the fact that they aren’t typically thought of as “high-risk” ones. It loses around 9% of its original worth the moment you sign the paperwork and drive it off the lot. However, the damage doesn’t end there; regardless of how well you maintain it, its value will decrease by another 10% within a year.
I knew going into this essay that buying a new automobile was one of the least wise investments you could make, and after giving GAP insurance some thought, I now think it’s even more foolish. For instance, if you decide to spend $50,000 on a new car, you are aware that by the time you have completed paying it off, the car will only be worth a portion of what you bought. It’s just how automobiles work. Thousands of individuals still buy new automobiles, though, and in addition to paying for all the other costs, they also acquire GAP insurance to make sure they don’t actually wind up losing money. I’ll ride the bus, please.