In the world of ridiculously expensive vehicles that we have been living in for the past couple years, GAP insurance has become a really great financial tool for consumers. But be careful! GAP insurance is not beneficial for everyone and you probably don’t want to purchase it from the dealership. Let me explain.
(1) What is GAP Insurance?
GAP insurance is an acronym for Guaranteed Asset Protection Insurance.
This type of insurance is an additional insurance that you can carry on your vehicle if you so choose/need.
GAP insurance insures the “gap” of what you owe and what your vehicle is worth in the case of an accident where your vehicle is a total loss.
Here’s how it works:
Adam buys a car for $35,000 that is only worth $28,000.
The next day he is in an accident and the car is a total loss. Sad day. 🙁
He tells his insurance company what happened and they send him a check for $28,000 (ignoring any deductible that he might have to pay) because that is what the car is worth.
He sends that check to the bank where he has the loan but he still owes $7,000 on that car even though it was a total loss. Ouch.
But have no fear! Adam has GAP insurance!
This means that the GAP insurance will pay the $7,000 “gap” between what Adam owes on the vehicle and what it is actually worth.
If Adam didn’t have this insurance then he would be responsible for paying the $7,000 difference.
Here’s a chart on how it works with GAP and without GAP:
| With GAP Insurance | Without GAP Insurance | |
| Price of Vehicle | $35,000 | $35,000 |
| Value of Vehicle | $28,000 | $28,000 |
| Amount the Insurance Company Pays | $28,000 | $28,000 |
| Amount GAP Insurance Pays | $7,000 | $0 |
| Amount You Still Owe | $0 | $7,000 |
The big thing you are probably wondering is how much it costs, right?
This insurance will depend on a few factors. The biggest one is where you purchase it.
You can purchase it through:
- Your auto insurance company
- A company that sells GAP insurance alone
- Through the dealership
- Through your bank or credit union
Make sure that you shop the price around also. Typically it will be the most expensive at the dealership (and you should negotiate that price down by about ½). And it will be the least expensive at a credit union.
I have seen GAP insurance cost as much as about $1,200 through the dealership and as little as $425 through a credit union.
It is also important to note that you don’t have to pay for this out of pocket if you don’t want to. You can generally roll the price of it into your loan. This will make your loan payments go up, but usually not too much.
(2) Not Everyone Needs GAP Insurance
Not everyone will need to purchase this, however.
If you buy a car and owe more than the car is worth right off the bat, then obviously you need to have GAP insurance.
But if you pay for a car in cash, you do not. Because there is no “gap” in what you owe and what the car is worth.
There is usually a tipping point at about the half-way point in your loan that you have built up enough equity that you don’t need to have it anymore.
The neat thing about this type of insurance is that you can cancel it when you want to! Just because you purchased it, doesn’t mean that you have to carry it through the entire time that you own the car. When you cancel it, the entity that you purchased it from will REFUND you the prorated difference.
For example, if you bought a car on a 60 month loan and paid $600 for GAP insurance, and you have paid on that loan for 30 months, it is probably advantageous for you to cancel it.
Since you still have half of your loan time left, you will be refunded $300 for the insurance that you didn’t use. Woo hoo!
This is because you now likely owe less on that car than what it is actually worth.
This means that even without the GAP insurance, if you were in an accident and the car was a total loss you would get a check from the insurance company that would pay off your existing loan as well as give you some extra money to put down on your next car.
So make sure to cancel your GAP when you hit the halfway point of a loan!
Final Thoughts
GAP insurance is a really good financial product for most people because most people don’t put enough money down on a vehicle to be fully covered if they were to be in an accident.
And with the relatively low cost of it, this insurance can really help you avoid a big financial mess if you were to be in a car accident.
Next time that you are looking for a vehicle, make sure to check out my other vehicle articles to have as much knowledge as possible so that you don’t end up in a financial pickle. 🙂
You can do this!
I am here for you!
Until next time!
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