GAP Insurance: What Is It And Do You Need It?
Posted March 19th, 2008 By Terrance Martone | Credit And Financing
When you come into Franklin Sussex Auto Mall, purchase a new or used vehicle and begin filling out all of the paperwork, our finance department might present you with an option called GAP Insurance. The cost of GAP Insurance is added to your monthly payment and usually only costs a few extra dollars per month.
GAP is often used as an acronym: Guaranteed Asset Protection. This type of insurance promises to make up the difference between the amount you owe on the vehicle and the amount it is actually worth (the gap), in the event of a loss due to theft or an accident.
So what exactly is GAP Insurance and why should you buy it?
As most of you probably know, your vehicle will lose value the moment you drive it off the lot, especially in the case of a new vehicle. In fact, in most new vehicle finance scenarios, you will likely owe more than the vehicle is worth for many years. In the event of a total vehicle loss, most insurance policies will only pay the current value of the vehicle. Since the current value is likely less than the amount owed, the difference becomes the responsibility of the vehicle owner.
This is where GAP insurance comes into play. GAP insurance pays the difference between what you actually owe and what the vehicle is worth.
If you are leasing, every manufacturer’s captive finance company (along with most of the other major independent leasing companies) include GAP insurance in the lease. They want to be protected, since it is their vehicle, and not yours. However, it is always a good idea to read your lease contract to make sure GAP is included. The coverage is usually listed on the back side of the lease contract
What about if you are financing?
For a new vehicle, I would seriously consider it. The added cost is minimal and it gives you piece of mind in the event that something happens. Exceptions would be if you have put a large percentage down (40% or more) in the form of cash or trade-in. With that much down, you will likely not be upside-down, or if you are, not for very long.
For the used vehicle buyer, it becomes an even bigger value question. Since used vehicles loose value at a slower rate, relative to newer vehicles, you may not be as upside-down for as long of of a time. However, if you are financing for extended terms (60 months or longer) or have a high interest rate, then it might be a good idea to purchase GAP insurance.
