Should You Buy GAP Insurance
What is GAP Insurance and should you buy it when purchasing your next car?
GAP is short for Guaranteed Auto Protection. It is an insurance policy that protects you in case you owe more than your car is worth. There is only one way that that can happen and that is if you take out a loan that is more than the value of the car. Here is how that can happen.
Imagine you go to a dealer and negotiate and buy a car for $25,000. You must add tax, license. DMV fees, smog abatement fees and any additional warranty that the dealer might talk you into. The “out the door” price will be much greater than the original price, perhaps closer to $30,000. If you were to finance 100% of that total amount you will quickly find that you owe more than the car is worth. In this type of purchase you could be as much as $5,000-$8,000 upside down on the loan.
This creates a huge problem for you in the event your car is stolen, or if you were in an accident and your insurance company considers it a total loss. The insurance company will only compensate you on the value of the car and not what you still owe. That means you will be responsible for that $5,000-$8,000 and you will no longer have a car to drive.
That would be a very bad situation for you. This is what GAP insurance is for. It is an insurance policy that pays the difference between what you owe and what the car is worth so you have no out of pocket expenses in the event of a total loss.
How Much does GAP Cost?
Car dealers try to maximize their profit at with every product they offer. GAP insurance is no different. You can expect a GAP policy to be around $300-$600 for a typical purchase. High end cars will be substantially more due to the higher depreciation. Just remember that GAP insurance is negotiable just like everything else at a dealership.
When I buy a car for a client I can typically get the GAP policy for about half what the retail customer would otherwise pay. Often that is a savings of a couple hundred dollars. You want to challenge them on the price they quote you.
How Long Does GAP Insurance Cover My Car?
A GAP policy is active for the term of the loan. The reality is that you do not need GAP the entire term because at a certain time during the loan period you will inevitably cross over into an equity position and your car will be worth more than the loan. That would be the case on a typical car loan of 48-60 moths. If you have a 72 or 84 month loan you will never have equity in the car and that is when you really need GAP throughout the loan period.
Can You Get a Refund on GAP?
You bet. Most people who buy GAP forget that they bought it (since it gets put into the loan). At a certain point in the loan when you cross over into an equity position in the car you simply call the dealer and cancel the GAP policy. They will issue you a check for the remainder of the loan. If you bought a policy for $500 and you ask for a refund at the halfway point in the loan you will receive half your money back. That is a chunk of money you do not want to leave on the table.
Greg Macke - Your Car Angel
Greg Macke is a car blogger and author of “My 7 Secrets to Buying a High Quality Used Car”. He is a professional car buyer and consumer advocate working closely in the industry to improve the buyer’s experience. His high quality car buying tutorials offer help to the car buying public. – See more at: https://carbuyingsupport.com