If you are ever going to buy a new car again and finance the purchase, you have a GAP to think about as you pull off the lot. Everyone knows what happens when you buy a new car; by the time you take it home is already worth 25% less. After about 18 months, it has lost about 50% of its value, but how much do you still owe? If you owe more than your new car is worth, that’s your GAP. If you block it because you could face a large sum of money to cover the GAP that your insurance policy does not pay.
Is that how it works: If you crash and your vehicle is a total loss, your insurance company will pay you what the car is worth, which can be very different than what you owe.
Example: Joe trades in his 2005 Dodge for a 2010 Chevy. He still owes slightly more on his Dodge than it is worth, so the dealer adds the difference ($ 1,000) to the purchase price of the new loan. Joe’s new car is going to cost him $ 25,000 + $ 1,000 from the Dodge, for a total of $ 26,000 + taxes = $ 27,976. Joe pays $ 2,500 for his down payment, leaving him with a balance of $ 25,476 to pay for the car. Twelve months later, Joe owes $ 21,655 when he has an accident and completely destroys his beloved Chevy. The insurance company does its job and writes Joe (the finance company, actually, since he still has the title) a check for every penny the car is worth – $ 14,500 – deductible ($ 500) = $ 14,000.
Who is responsible for the difference of more than $ 7,000? You guessed it, Joe is.
The above example happens every day. The insurance company has done its job and paid everything they have to pay: what the car is worth. Unfortunately, YOU are obliged to pay more than it is worth. YOU are obligated to pay what you owe!
How GAP insurance works: If you can imagine yourself in Joe’s situation, you need GAP insurance. As the name implies, it insures against any gap you may have between what your car is worth and what it owes. So in the example above, Joe’s insurance company would have paid Joe the amount the car was worth PLUS the additional $ 7,000 + he still owed. There are two places where you can buy GAP insurance, through the dealer that sells you your new car or through your insurance agent. GOAL, one of the two will cost you 300% more!
Through the dealer: One of the biggest sales at the dealership is GAP insurance. They charge a fortune for it (usually around $ 400) and then add it to their financing. Financing $ 400 for 5 years at 5.5% ends up costing $ 470. That’s not bad compared to paying the extra $ 7000 Joe got stuck with, BUT it is way more than he needs to pay. Instead of getting your GAP insurance through the dealer, get it from your local professional insurance agent for a fraction of the cost.
Through your insurance company: GAP insurance can be added directly to your auto insurance policy for around $ 12 for 6 months. It’s the same coverage and protection, but the total cost for 5 years is $ 120. That’s a $ 350 savings just for where you bought your GAP insurance. Make sure your insurance company knows if you are buying or renting, as that can affect GAP protection.
Every time you can save $ 350 AND get the same protection, you’ve made the right financial decision. Be sure to buy GAP insurance if you need it, but DO NOT buy it from dealers or you will pay too much.
