Gap Insurance — Do you Need it?

Gap Insurance — Do you Need it?

When buying a new (or new to you) car, you are faced with a number of decisions at a time when your adrenaline is likely running a little high. Car dealers count on this, and everything they do works to encourage it. You are so high on your new purchase that you want to do everything humanly possible to protect it; that often includes buying credit life and credit disability insurance, and gap insurance. Dealers make a commission for selling these products, and it is one of the areas where profits have remained high for the stores.

Gap insurance is designed to pay off your car in the event that it is a total loss due to damage or theft. Basically, it covers the “gap” between what you owe and what it is worth– which can be much less than what you believe its value to be. Many cars lose as much as 20% of their value when driven off the lot, and even those that hold their value best are only worth about 60-65% of their sticker price at three years old.

If your three year old Cadillac DTS with an MSRP of $59, 875 is stolen and unrecoverable, your automobile insurance company will send out an appraiser and gather the facts before making you a settlement offer. Of course, if you’ve been making your monthly payments estimated at $974 spread out over 72 months, you probably think you’ll be in pretty good shape. At the halfway mark in your loan, you will still owe almost $31,000. Even more shocking is that the fair market value for your car is likely much closer to $21,000, leaving you with a huge “GAP.” If the accident was your fault, you are also responsible for your deductible. If you have gap insurance on your Cadillac, you won’t have to write that check for ten grand for a car you no longer own!

Should you Buy Gap?

Gap insurance is relatively inexpensive, and worth the small extra amount paid, IF you will owe more than what your car is worth. There are lots of things that can play into this: high interest rates, low down payments, too much owed on a trade-in, etc. If your balance to finance is more than about 80% of sticker price, you should carefully consider gap insurance.

Also, don’t be lulled into a false sense of security when leasing your vehicle. You are still responsible for the cost of your car if it’s deemed a total loss and is often far more important to consider for leased vehicles. In fact, some lease agreements require you to purchase gap insurance, and it is a part of your lease contract.

Of course, if you buy a car and put down a significant amount, keep your payment term short, and your interest rate low, chances are that gap insurance isn’t as important. Just in case, cheap gap insurance is always available.

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