What Is GAP Insurance and Do I Need It?
When you buy or lease a new vehicle, one option a vehicle dealer may offer is called GAP insurance. Is GAP insurance a gimmick or a legitimate product, and should you consider buying GAP insurance? Here is some information about GAP insurance to help you decide if it may be worth the investment.
What is GAP insurance?
Guaranteed Asset Protection (GAP) insurance is optional coverage to fill in the “gap” between what you owe on your car and what it's worth. GAP insurance would come in handy if your car is totaled or stolen and you owe more than what the car is worth. Gap coverage is available to the original loan or lease holder on a new vehicle.
Why would I need GAP insurance?
If your down payment was less than 20% or if you financed your loan for 60 months or more, you could be “upside down” on your loan. Plus, as you may know, new cars lose value (depreciate) as soon as they’re driven off the lot. Combine these factors and you may end up owing more than what your car is worth.
The issue that GAP coverage tries to address is that if your car is stolen or totaled, your auto insurance will only pay for what the car is worth right now – regardless of how much you paid for it or how much you owe. This difference can be thousands of dollars, which you would have to pay for out of pocket.
Also, when you lease a vehicle, the dealership may require that you buy GAP insurance.
If I buy GAP insurance, how long should I keep it?
You should keep GAP insurance until you no longer owe more than what the car is worth. Generally speaking, this takes about two years. You could use online car value guides, such as edmunds.com, to get an idea of your vehicle’s worth.
Also, if you pay off your loan early or sell the vehicle, make sure to cancel the policy.
How much does GAP insurance cost?
Costs vary depending on the make and model of your vehicle, the actual cash value of the vehicle, and many other factors. Learn more from Investopedia.
Should I buy GAP insurance from my vehicle dealer?
As with other purchases, it would be beneficial to compare coverage options from your dealer, from financial institutions (banks and credit unions), and from your auto insurance provider. Choose whichever insurance policy offers the options you want at a price you feel comfortable with.
Affinity offers competitively priced GAP insurance to our members. Get a quote today!
Review Your GAP Policy Carefully Before Buying
Not all GAP policies are created equally. Make sure to read the policy thoroughly to understand any coverage exclusions before you buy your policy. If you’re unsure about the coverage, ask the GAP insurance provider to explain in more detail.
Final Thoughts
GAP insurance can make sense for people who put no or little money down or choose a loan payoff period of five years or longer because they may owe more than their vehicle is worth. If you decide to buy GAP insurance, compare offerings from your car dealer, financial institutions and your insurance agent to see who has the best deal. Finally, remember to cancel GAP coverage when you no longer owe more than the vehicle is worth, or if you pay off the vehicle early.