What Is Gap Coverage And Why Do I Need It
With new car season coming up quickly, we thought we would republish this blog on GAP Coverage. Buyer beware at the dealerships!
-What is the purpose of GAP coverage?
Also known as Loan/Lease, GAP is a little known auto insurance policy coverage that everyone with a new car and a loan to go with it should know about.
If you have purchased a brand new car and that car has a loan or a lease on it, then you most likely need GAP coverage.
Have you ever heard the old saying that your new car just lost $1000-2000 as soon as you drive it off the lot? That saying is more truth than you may realize. Most “New” cars depreciate greatly during the first few months of ownership. The longer your loan term is, the truer this statement becomes. This creates a “GAP” between what your car is worth on the used car market and what your loan payoff is. GAP Coverage will help fill the financial difference (GAP)between what your car is valued and what you still owe on your loan in the event a total insurance loss to your car.
What about a used car, should you get GAP coverage if you buy a car that is a couple of years old? That depends. How long is your loan and how used is your car? At some point the major depreciation on a new car will slow down sharply. This means that the older the car the less you may need GAP Coverage. However, if your car is a later model year and you have a long term loan, say 4-6 years, then you may also have a need for GAP Coverage. Check with your agent for more info.
In a nutshell you should be honest with yourself. Evaluate the value of the vehicle and research what models like yours have depreciated in the past. I would suggest that you error on the side of caution here and get the GAP Coverage if you think there is a possibility that your vehicle could fit in this category.
-How do I buy GAP Insurance?
Is my auto insurance policy the only place to get GAP Coverage? No, you can buy coverage from your dealer at the time you purchase your car. In fact, it is almost a guarantee that the dealer will offer it. You may even find a stand alone policy that you can buy from an unrelated third party or from your lending institution. But buyer beware! The cost of that coverage may really set you back a pretty penny.
Dealers and third party sellers of GAP are basically in the same classification. Dealers use third party sellers of GAP and then wrap them into the deal on the car purchase. This can be very expensive. Our customers at Taylor & Associates Insurance Agency have told us that they have been offered GAP coverage from the dealer at amounts as high as $800-900. This amount is then added to the bottom line of the car sale price and straight in to the loan that you will then pay interest on for the next 4-6 years.
-How much should I pay of GAP insurance?
Why is buying GAP from a dealer or a third party a bad deal you ask, surely it could save me much more than $800-900 on my vehicle if I need to make a claim? True, but the typical cost of GAP insurance on your auto insurance policy varies at only around $30-60 per year and you will probably not need to keep the GAP coverage more than 2-3 years. Let’s add this up. In a worst case scenario, you will pay $60 per year for 3 years for a total of $180 if you add GAP Coverage on your auto policy. That is much less than the dealer cost of $800-900 and that doesn’t even count any interest you will pay on your loan due to the dealers GAP coverage being added to your car loan.
OK, GAP Coverage sounds great, right? It is, but there are a few things you should know. For one thing, GAP coverage will typically not cover any costs added to your car purchase such as extended warranty, road hazard or wheel and tire specialty coverage offered at some dealers. Also, GAP will usually not cover any amount that you were upside down in your trade-in. So if you owed more on your trade-in than the dealer was willing to give you, you will still be upside down in the event of a GAP Coverage claim.
Talk with your Insurance Agent or contact us to find out if GAP coverage is offered on your policy and to see how much it would cost to add on the protection to your vehicle.