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, check your auto policy and 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?