Do You Need Gap Insurance?

When purchasing a car, many people are faced with the option of getting gap insurance. While it may seem like an unnecessary expense, gap insurance can be a lifesaver in certain situations. In this article, we will discuss what gap insurance is, how it works, and whether or not you need it for your car.

What Is Gap Insurance?

Gap insurance, or Guaranteed Asset Protection insurance, is an optional insurance policy that covers the “gap” between the actual cash value of your car and the amount you owe on your car loan. In the event of an accident or theft, if your car is deemed a total loss, your regular insurance policy will only pay the actual cash value of your car at the time of the loss, which may be less than what you still owe on your car loan. Gap insurance covers the difference between the actual cash value and the remaining balance on your loan.

The amount of the “gap” can vary based on several factors, including the amount of your car loan, your down payment, and the rate of depreciation of your car.

How Does Gap Insurance Work?

Let’s say you purchase a new car for $30,000, and you put $5,000 down. You take out a car loan for $25,000 with a 5-year term. After 3 years, you are involved in an accident and your car is deemed a total loss. At this point, your regular insurance policy will only pay the actual cash value of your car, which may be $20,000. However, you still owe $15,000 on your car loan. This is where gap insurance would come in – it would cover the $5,000 difference between the actual cash value and the remaining balance on your loan.

Without gap insurance, you would be responsible for paying the remaining $5,000 out of pocket – in addition to having to purchase a new car.

When Do You Need Gap Insurance?

Gap insurance is not necessary for everyone. It may be most beneficial for those who:

• Purchased a new car with little or no down payment
• Took out a car loan for a longer term (over 60 months)
• Purchased a car that has a high rate of depreciation
• Would have difficulty paying the remaining balance on their car loan in the event of a total loss

If you fit one or more of these criteria, you should strongly consider purchasing gap insurance.

FAQ

What does gap insurance cover?

Gap insurance covers the “gap” between the actual cash value of your car and the remaining balance on your car loan in the event of a total loss (due to accident, theft, etc.).

How much does gap insurance cost?

The cost of gap insurance varies based on several factors, including the amount of your car loan, your down payment, and the rate of depreciation of your car. On average, gap insurance costs about 5% of your regular insurance premium.

Can I purchase gap insurance after I have already purchased my car?

Yes, you can purchase gap insurance after you have already purchased your car. However, it is usually more cost-effective to purchase it at the same time as your car, as you may be able to negotiate a better rate with your car dealer or lender.

How long do I need gap insurance?

You only need gap insurance for as long as you owe more on your car loan than the actual cash value of your car. Once this “gap” has closed (either from paying off your car loan or from your car’s value increasing to match or exceed the amount of your loan), you no longer need gap insurance.

Is gap insurance worth it?

Whether or not gap insurance is worth it depends on several factors, including the amount of your car loan, your down payment, and the rate of depreciation of your car. If you fit one or more of the criteria listed above, gap insurance may be worth the extra expense for the peace of mind it provides.

Conclusion

If you are considering purchasing a car and are offered gap insurance, it is important to weigh the potential benefits and costs before making a decision. While it may seem like an unnecessary expense, gap insurance can provide valuable protection in the event of a total loss. If you have any questions about whether or not you need gap insurance, speak with your car dealer, lender, or insurance provider for more information.