Understanding Gap Insurance: What it Covers and Whether You Should Buy It
When you’re finalizing the paperwork at the dealership, you may come across a term that is unfamiliar to you: gap insurance. It’s not uncommon for car shoppers to feel unsure about whether to add it to their purchase. So, what exactly is gap insurance and what does it cover?
Gap insurance is designed to cover the difference between the actual cash value of a vehicle and the amount owed on it. Let’s say you financed a car for $30,000 with a down payment of $3,000, leaving you with a remaining loan balance of $27,000. Unfortunately, if you were to get into an accident and your insurance company deems the car as totaled, they may only offer you $22,000 due to depreciation. This means you would be responsible for the $5,000 difference.
Gap insurance steps in to cover this difference, ensuring that you don’t have to pay it out-of-pocket. Interestingly, the name “gap” doesn’t refer to the difference between the vehicle’s worth and what is owed; it’s actually an acronym for “guaranteed asset protection.” The scenario mentioned earlier demonstrates a practical example of when gap insurance plays a crucial role. It is particularly valuable if you make a small down payment (less than 20 percent), have a long finance term of 60 months or more, or own a vehicle that tends to depreciate quickly. Additionally, leasing companies often require gap insurance, and if you have a high annual mileage, it can be beneficial to have as well.
Now that you understand what gap insurance is and its purpose, the question remains: should you buy it? Many shoppers find gap insurance to be a sensible addition and not just a dealer ploy. However, it’s important to consider the cost. Dealerships typically offer gap insurance at a flat rate of $200 to $500. At first glance, this may seem like a good deal compared to potentially paying thousands later. However, your insurance provider likely offers gap insurance as an add-on to your regular policy at a much lower cost. Prices typically range from $20 to $60 extra per year. It’s worth noting that unlike the dealership’s up-front rate, you can cancel gap coverage once the vehicle’s value matches the remaining loan balance. Furthermore, if you purchased gap insurance from the dealership, you may end up paying interest on it for the duration of your loan.
In conclusion, gap insurance can be a valuable way to protect yourself from financial liability if you owe more on your car than its worth. However, it’s crucial to compare the cost offered by your insurance provider against what the dealership is offering. Taking the time to shop around and consider your options will ensure that you make an informed decision about whether or not to purchase gap insurance.