While you’re in the finance office wrapping up your paperwork, the finance manager will always offer you something called GAP insurance. There are times when you want GAP, and times when you don’t. Let’s take a look at what GAP Insurance is.
What is GAP Insurance?
GAP Insurance covers the gap between a car’s value and your payoff, in the event of a total loss. Let me paint you a picture to make things easy. Let’s say you’ve just purchased a brand new Chevy Tahoe with all the goodies. After your discounts, rebates, and tax, your total amount financed is, say, $36,000. A few minutes down the road, an Escalade races through a red light and smacks your brand new Tahoe in the side. Fortunately, all that sheet metal and all those airbags keep you safe and sound, just like they’re supposed to.
Your Tahoe was not so lucky, and the insurance company declared it a total loss. They’ll be writing a check to your bank for the value of your trade - $31,000. But wait a minute - you owe $36,000. And you can be sure the bank will want the full amount. So you’ll have to get out your check book and cover the additional $5,000. Ouch - someone wrecks your new ride and you’re out $5,000 - that hurts.
If you had purchased GAP Insurance before you drove your new Tahoe away, then you wouldn’t be in for such a rude awakening. See, GAP Insurance covers the gap between the value of your car and the payoff. In this case, the GAP Insurance would’ve paid the remaining $5,000. You wouldn’t need to pay it yourself if you had GAP.
How much does GAP Insurance cost?
Ahh, you’ve asked the magic question. The type of vehicle will affect the cost of GAP, as will the place you purchase it. Car dealers are notorious for marking up GAP insurance - I’ve seen dealers charge as much as $800 for GAP. You should really consider buying GAP from the bank you finance with, or a separate insurer. You can end up saving several hundred dollars, and still get the exact same coverage. But remember, always make sure you have GAP insurance before you drive off the lot.
Do I always need GAP?
No. If you put down a very large down payment, or traded in a paid-off vehicle that was worth quite a bit, then you may not need GAP insurance. Using the Tahoe example from above, let’s say you had put down $8,000 when you bought your Tahoe. Your payoff would then be just $28,000. Since the insurance company valued your car at $31,000, you wouldn’t have any negative equity, and thus no need for GAP.