What Gap insurance is And Why You May Need It
GAP is the acronym for Guaranteed Auto Protection, it expands the coverage on your automobile insurance policy to cover you for the value of your car loan rather than the cash or "book" value of your car. Car owners who need it are those who owe more on their car than the cash value. The minute you drive your car away from the showroom it depreciates by 9 to 10 percent. This means that if you have financed your car, it is most likely worth less when you get it home than when you signed the sales agreement, If you owe.
Say you bought a car for $32,000 and put 5 percent down, your loan is in the amount of $30,400. As you are driving home a car runs a red light and T-bones you, crashing hard into the side of your car. He is uninsured and your insurance company declares your car a total wreck.
The "book value" for your car is $28, 800 but you owe the finance company $30,400, or $1,600 more than you are covered for. Unless you have GAP insurance you will have to pay that $1,600 out of your own pocket. Should you have purchased GAP insurance? Yes as the premiums are miniscule compared to your out of pocket expense.
When You Don’t Need Gap Insurance
Don’t fall into the trap of buying a product you do not need though. Basically there are only two reasons to carry GAP insurance.
- When you owe more on the car than it is worth
- If you are leasing a car
Most other times you do not need GAP insurance coverage for your automobile as there is nothing it will protect you from.
Had you put down a larger down payment, say 10 percent in the above example, your insurance coverage without GAP coverage will pay the total that you owe, so no need for GAP coverage.
Likewise, if you bought an old car from your uncle for $500 there really is no reason to buy GAP insurance. Frequently finance companies will add GAP insurance to your loan, check with your insurance agent to see if the insurance company can provide it for less.