Gap Insurance: A Smart Buy in Today’s Car Market
If you’re considering purchasing a new vehicle, you’ll likely encounter a range of add-ons at the dealership. While some, like extended warranties and fabric protection, might not be necessary, gap insurance is a worthwhile option to consider.
With new car prices averaging about $10,000 more than five years ago, and financing terms stretching to six or even seven years, an increasing number of vehicle owners are finding themselves in a challenging financial situation.
What is Gap Insurance?
Gap insurance, which stands for Guaranteed Auto Protection, covers the difference between a vehicle’s actual cash value (ACV) and the outstanding loan balance if the car is stolen or totaled in an accident. When a financed vehicle is declared a total loss, the insurance company pays the ACV, not the original purchase price. This could leave the owner owing money to the lender. This is especially true with minimal down payments and quick depreciation.
Edmunds.com reports the average amount owed on “upside down” loans is now at $6,458, making gap insurance potentially vital.
Who Needs Gap Insurance?
Experts recommend considering gap insurance in certain situations. These include:
- Making a down payment of less than 20%.
- Rolling over a balance from a previous car loan into a new purchase.
- Financing a car for 60 months or longer, especially at today’s high interest rates.
For example, imagine a car originally priced at $40,000, with an outstanding loan balance of $32,000. If the vehicle is totaled and its actual cash value is $26,000 (and you have a $1,000 deductible), your insurance payout would be $25,000. Gap insurance would cover the remaining $7,000.
How to Get Gap Insurance
Gap insurance is offered by new-car dealerships, and it can often be added to an existing auto insurance policy. Costs and terms will vary.
- Adding it to an existing policy typically costs a few extra dollars per month.
- Purchasing it through a dealership might cost between $400 and $700.
Some policies include coverage for the comprehensive and collision deductible, and some insurers bundle it as part of their new-car replacement coverage.
Gap Insurance and Leasing
For those leasing a new vehicle, gap insurance is typically required. The leasing company or the automaker’s financing division generally includes the cost in the agreement. Because a lease is virtually unbreakable, gap insurance protects against financial liability if the vehicle is totaled or if the lessee can no longer afford it.
When Gap Insurance Isn’t Needed
If you own a vehicle outright (no loan), gap insurance isn’t necessary. Similarly, if you have a car loan but the vehicle is worth more than what you owe (due to a large down payment or higher-than-expected resale value) gap insurance would be redundant.
