Gap Insurance – What is it? and Do I Need it?


What is Gap Insurance?

When you purchase a new vehicle the minute you drive it off the lot the value of the vehicle depreciates, up to 30% depending on the make and model.  If you purchase a vehicle and finance it with less than 20% down you just might be upside down the minute you drive your new vehicle off the lot.  If you have the misfortune of totaling the car you could be on the hook for the difference in the depreciated value and the amount you owe on your loan.  Gap Insurance covers this negative equity balance.

Buying Gap Insurance

Before buying Gap Insurance make sure you are not already covered.  Some auto insurance companies include Gap coverage in standard policies and leasing companies typically include Gap coverage in the lease agreement. Gap insurance purchased from any business other than an insurance company is typically a one-time charge of hundreds of dollars.  If purchased through your insurance company they will add the Gap insurance premium to your regular auto policy premium.  Shop around for Gap insurance since not all policies offer the same coverage.  For instance some policies offer vehicle replacement and some offer to reimburse your deductible.

Cancel Gap Insurance When Gap Equals Zero

If you purchase Gap Insurance through your insurance agent and not the dealer, you can save some money by canceling coverage when you are no longer upside down or have no Gap.  In order to determine when you can drop the Gap coverage you will need a loan amortization table for your auto loan and you will need to periodically check the Kelly Blue Book value.  When the loan balance and the Kelly Blue Book Value are the same you can drop the Gap Insurance.

Things to Consider…

  • Research online Gap Insurance Providers thoroughly before providing payment or personal information.
  • Car Dealers typically are not the least expensive source for Gap Insurance
  • Buying Gap Insurance from an Insurance Company allows you to cancel when Gap is zero.
  • Avoid being upside down by making a large enough down payment.

After reading this article, do you think you may have been upside down on a car loan and not realized it?

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33 Responses to Gap Insurance – What is it? and Do I Need it?

  1. 20's Finances 11/28/2011 at 6:12 am #

    Sounds like a good idea for those who have lots of money to throw around… I’d rather buy a used car that will have no gap and avoid having to pay even more for the new car smell. Just my preference.

    • Paul 11/28/2011 at 6:53 am #

      With 10.5 Million light vehicles sold in the U.S. this year and approximately 30% of consumers buying Gap coverage through the dealer it is a form of insurance that many people probably need. You can save money by buying Gap coverage through an Insurance company since dealers typically charge more. My next car will be a used one also..

  2. Miss T @ Prairie Eco-Thrifter 11/28/2011 at 8:05 am #

    I have never heard of gap insurance. I am not even sure if it exists in Canada. If I do ever buy a new car I will definitely look into seeing if it is an option.

    • Paul 11/28/2011 at 5:49 pm #

      Miss T – If you purchase a new vehicle and put down less than 20%, more in some cases, you will probably need some sort of Gap coverage for a couple years. I would think their is similar insurance available in Canada.

  3. PKamp3 11/28/2011 at 8:48 am #

    I’m a fan of buying off-lease vehicles – I know they’ve been maintained to the dealer schedule (um… since the dealer does the maintenance…) and they have a mile limit per year.

    The funny thing is, post Cash for Clunkers leasing has started to make sense for some vehicles. I’m serious – it’s a blog post on its own, but it’s not the horrible deal it once was. Anyway, new cars offer a value they didn’t just a few years ago.

  4. krantcents 11/28/2011 at 12:40 pm #

    I haven’t a new car in years, I forgot about gap insurance. I generally heard it regarding leases before today. It hink it is a good idea for the first few years.

    • Paul 11/28/2011 at 5:57 pm #

      I will most likely buy a used car in the next couple of years to commute to work, Mazda MX-5 convertible maybe. :) There are a lot of people out there that are upside down and don’t know that they are. As long as you have a few thousand in the bank that you would be happy to hand over to the finance company if you total your car. Gap insurance simply protects you from loss.

  5. The Jenny Pincher 11/28/2011 at 12:54 pm #

    Great topic and one that I don’t think enough consumers understand! Gap insurance has it’s place so it’s good to know both sides so you can decide what is right for you. My car is over 6 years old so I don’t have it (and didn’t when I bought the car new) but I believe my insurance does have a clause for that. I should check it out!

    • Paul 11/28/2011 at 5:59 pm #

      If you don’t want the coverage just make sure you make a large enough down payment to cover that first year depreciation. Or buy used.;)

  6. John@MoneyPrinciple 11/28/2011 at 3:20 pm #

    I I’ve never heard ot Gap Insurance in the UK although the scenario you paint is real enough and it should of course be cancelled once it is not needed.

    Here you generally have two options – the legal requirement of 3rd party and fully comprehensive which you generally buy for new cars – or not ancient ones anywy. I guess comprehensive includes the equivalent to Gap iinsurance.

    Comprehensive insurance rates are effectively determined by the cost of spares and servicing for a car because that is the majority of the cost of claims. We have to have our cars tested once they are three years old and it is quite a thorough test. So the price of second hand vehicles in the UK is generally quite low (I will be posting on this shortly on MP).

    When you insure the car here, it makes no difference to the premium until the car is over £20k ($30k) or thereabouts, nor does it make much difference how far you drive a year. What does affect it is how many drivers are insured to drive it and particularly if any of them are young – under 25…

    For the record, we pay about £300 ($450) a year for our Mercedes A class, parked on our driveway at night in a city. How does that compare?

    • Paul 11/28/2011 at 6:06 pm #

      I wonder if your policy covers your total loss? In the U.S. Gap is included in the lease payment. I pay around that for a 2001 Ford F150 Supercrew for the year. Rates should come down now that my 20 year old son has moved out of the house.

  7. YFS 11/28/2011 at 3:55 pm #

    I had gap insurance on both of my vehicles. I think it is well worth if you plan on buying new and keeping the payments for the entire length of the loan. The loan doesn’t go away if your car gets totaled. Also, it is a good chance your car is worth less than the note. I wouldn’t recommend buying the gap insurance from the dealer. There are cheaper alternatives.

    • Paul 11/28/2011 at 5:44 pm #

      Your best bet is shop a few insurance companies, just make sure policies have the same coverages so you can make comparisons. Enjoy your week!

  8. Barb Friedberg 11/28/2011 at 7:45 pm #

    Interesting concept. I’d probably go for taking a risk and skipping the gap insurance, drive carefully and have enough in an emergency account for the what ifs.

    • Paul 11/28/2011 at 10:56 pm #

      Except the typical Gap premium is hundreds of dollars while the Gap in loan to car value is thousands the first couple years so Gap can be a good value.

  9. Shaun @ Money Cactus 11/29/2011 at 5:33 am #

    I’m the same as Miss T, not actually sure that we have this in Australia… I’ll have to check, although it is unlikely we will be buying a new car for a while!

  10. Marks@ Car Insurance 11/29/2011 at 4:13 pm #

    When you buy GAP insurance directly from the dealership that you have bought your vehicle from they are legally bound to charge you insurance premium tax at a much higher rate. This is not their fault and is instead a legal requirement.

    • Paul 11/29/2011 at 10:27 pm #

      Glad you shared that! Didn’t mean to imply fault here just how to save money. ;)

  11. I don’t think I heard about gap insurance until I purchased my very own car, for the first time, in 2007. I put about 30% down on my car, so fortunately, there was no need for gap coverage. As a matter of fact, if you have to buy gap insurance coverage, you probably shouldn’t be borrowing money to buy a car.

  12. Amanda L Grossman 11/30/2011 at 7:09 pm #

    I have never heard of gap insurance before! I also buy used cars in cash, so no need for me (at this point). Interesting though!

    • Paul 11/30/2011 at 10:47 pm #

      It is cheap protection that can be cancelled once you have positive equity. I will be buying used as well and will not need Gap on that vehicle.

  13. JP @ Novel Investor 12/03/2011 at 4:16 pm #

    First time hearing about gap insurance, though I’ve never bought a car or have a reason to do so in the near future. Good to know though.

  14. UltimateSmartMoney 12/03/2011 at 7:25 pm #

    I have never heard of gap insurance and it seems like something I will never be interested in. But then again, I don’t buy too many new cars…

    • Paul 12/03/2011 at 11:26 pm #

      You are right, unless you lease or buy new you don’t need Gap insurance.

  15. World of Finance 12/03/2011 at 7:25 pm #

    Nice overview of GAP insurance. This never applied to me as I bought my car used with cash and have kept it for 12 years. :) It turned out to be a great investment. ;) Typically, you loose too much with a car.

    • Paul 12/03/2011 at 11:43 pm #

      Nice! I have a 10 year old F150 and am looking for a used car to commute to work. Gap only makes sense if you are leasing or buying new. Sure is nice not having a car payment!

  16. Jackie Verdier 12/05/2011 at 2:10 am #

    It sounds a lot more complicated than in the UK. Here you can buy a policy then simply defer the start date. There is also a lot more choice in that you can choose how the policy performs. Clears finance protects invoice even replacement. The price is also fixed at the point of purchase so no looking at Kelly Blue Book. It is also a lot cheaper. Is the Kelly Blue Book the guide vehicles are valued at, same aas glass’s guide in the UK ?

    • Paul 12/05/2011 at 6:24 am #

      Everything is more complicated in the States Jackie! ;) I believe the policy is written to cover current market value of vehicle so people wouldn’t be tempted to stage an accident so they can collect. This concept is called moral hazard over here. An yes KBB is the same as glass’s guide. So if I understand correctly Jackie, in the UK I can buy a policy on a new auto for purchase price, wreck it 10 years down the road when the vehicle has little value, and collect the purchase price from the insurance company?

  17. hgstern 12/14/2011 at 7:15 am #

    Cavalcade of Risk #146 is up, and your post is in it:

    http://www.chatswood.co.nz/moneyblog/2011/12/cavacade-of-risk-146.html

    Please tell your readers.

    And a friendly reminder to newbies and regulars alike that, while it’s not mandatory to give a link back, it’s the way that carnivals work best. If your submitted post has been included in the Cav, please remember to post about it on your blog because it helps us all.

    Thanks!

    Hank Stern

  18. Van R. Mayhall, III 12/14/2011 at 9:32 am #

    Good information, and some solid things to consider, as well.

    • Paul 12/14/2011 at 4:15 pm #

      Glad you found the information useful!

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