What Is Gap Insurance? Is It Worth It?
If you’re thinking about buying a new car, you want to make sure that you are properly insured before you drive off the lot. In addition to liability insurance, which is a legal requirement, there are many other types of insurance policies that you can purchase. One such policy is GAP insurance.
But what is GAP insurance, and should you purchase it? Read on to learn more about this type of coverage and whether or not you should invest in it when you purchase a new car.
GAP Insurance Explained
GAP is an acronym for Guaranteed Auto Protection. This type of insurance is not mandatory, but rather an additional coverage option. The purpose of this type of insurance is to cover the value of a car between the amount that you owe on it and the amount that the car is actually worth.
Still confused? Here’s a hypothetical situation that better describes how GAP insurance works:
You purchase a new car for $20,000. You financed the entire $20,000 over a 48 month period. Twelve months after purchasing the car, you are involved in an accident that totals the car. In this type of situation, your insurance provider would cover the actual value of the car; $12,000, for example. However, depending on the terms of your loan, you might still owe $17,000 to your lender, if not more. If you had GAP insurance, your insurance provider would cover the $3,000 difference between what your liability or collision insurance would pay for the car and the amount of your loan. Without GAP insurance, you would be responsible for paying the $3,000 out of your own pocket.
In other words, GAP coverage protects you from losing money in the event that your car is totaled in an accident.
Is GAP Insurance Worth It?
So, is GAP insurance worth your while? That really depends on your unique situation; namely, it depends on the amount that you pay for the car.
For example, if you purchase the car in cash or you put down a sizeable payment (more than 20 percent), purchasing GAP insurance really isn’t worth your while. Why? – Because this type of coverage is only intended to protect you if you owe more money than the car is actually worth. In situations such as these, it’s highly likely that you won’t owe more than the value of the vehicle.
With that said, if you end up financing the car over a long period of time – generally, longer than 48 months – you put down a minimal amount of money, or you don’t put any money down at all, GAP insurance could be a very wise investment. The reason? – The value of a car usually depreciates much faster than you will pay off the amount you owe on a loan. In other words, in these types of situations, it’s highly likely that, if you are involved in an accident, you will owe your lender more than the car is actually worth. Remember that your insurance company will only pay the lender the value of the car; not the amount of your loan, which means you could end up having to pay a sizeable amount of money out of your own pocket.
How Much Does GAP Insurance Cost?
The cost of GAP insurance varies. There are a number of factors that will be taken into consideration when determining the cost of this type of coverage. The cost of the vehicle, the amount you are paying for it out of your own pocket, and the amount that you are financing are just some of the factors that will be considered.
However, generally speaking, if you are planning on financing the majority of the purchase price of the vehicle, and you are doing so over an extended period of time (4 years or more), the cost of GAP insurance would be very well worth your while. If you do end up getting into an accident and your vehicle is totaled, this type of insurance could save you thousands of dollars; more than you actually pay for it.
Things to Consider
Before you decide to purchase a GAP insurance policy, it’s important to take a few factors into consideration, outside of the amount that you plan on financing. These factors include:
- How often you plan on driving the car. If you won’t be driving it often, GAP insurance may not be worthwhile; but, if you plan on putting a lot of miles on it, this type of coverage could be very wise.
- Where you will be driving. If you will be driving in conditions that are generally not hazardous, it might not be a wise investment; however, if you drive in rush hour traffic or on treacherous roadways, it could be a good decision.