Is GAP insurance worth it on a new car?
You might want GAP auto insurance if you, (1) only put a small deposit down, (2) chose a longterm loan, or (3) traded in a vehicle with negative equity.
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UPDATED: Nov 2, 2021
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- GAP insurance is a supplemental form of protection that’s considered optional for new and used car buyers
- When you buy a new vehicle, the value of the car will depreciate by almost 10 percent of its original value when you drive the car off of the lot
- By the end of year one, the vehicle will only be worth about 80 percent of its original value
- If you file a claim for damage to your vehicle, your insurer or the insurer responsible for paying the claim will only pay up to the value of your car
- If you didn’t make a large down payment or you rolled over negative equity into the principal of your loan, having GAP insurance can ensure that the loan is paid off
You can buy specialty insurance products to protect you against virtually any event.
There’s disability insurance to help you cover bills when you’re disabled, there’s accident insurance to pay for emergency medical bills after an accident, and there’s even trip interruption insurance that pays for flights back home if an emergency stops your vacation.
With all of the different specialty products that you can purchase, it’s no surprise that there are providers who offer GAP coverage that will pay off your auto loan when your insurer won’t.
Unfortunately, specialty insurance products are huge money makers because the likelihood that you’ll file a claim is very low. If you’re interested in finding out whether or not GAP insurance is worth it, here’s a guide that can help you make a decision.
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What is GAP insurance?
GAP, which stands for Guaranteed Automobile Protection, is an optional form of insurance that’s available to borrowers and consumers who lease vehicles.
The purpose of the insurance is to pay off the loan or whatever is due under the leasing contract after a covered auto is totaled in an accident or another type of covered loss.
If you’re interested in buying GAP insurance on a vehicle, you should know that not all vehicles are eligible for the extra protection.
If you purchase a new vehicle, you’ll have no problem finding an auto insurance carrier or bank that’s willing to extend you an offer for GAP protection. If, however, your vehicle is older, you may not be eligible for coverage.
Auto insurance companies state how much they will pay to repair any vehicle on your policy under your contract.
While your actual policy documents don’t have a fixed limit that you can reference, the insurer is only obligated to pay up to the car’s fair market value when the vehicle needs to be repaired.
If you don’t owe more on your vehicle than it’s worth, your loan will be paid off by your insurer after you file your claim.
The problem is that most people who purchase or lease new cars will owe more on their contract than the vehicle is worth almost right after you take possession of the car.
When you have extra GAP protection, it will fill in the gap between what your insurer covers and what you owe.
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Why does it make sense to buy GAP for new cars?
You don’t always need to buy GAP insurance on a used car that you’re financing, but it almost always makes financial sense to pay for the protection if you’re financing a new model.
New cars depreciate very quickly. A car that’s never been owned will lose as much as 10 percent of its value as soon as it’s purchased.
After the first minute of ownership, the car loses another 10 percent of its value within the next 12 months. Each year thereafter, the car will depreciate in value more and more.
After just four years of ownership, a new car is worth less than half of what it was worth when you bought it.
Almost everyone who finances or leases a car needs GAP insurance at one point and time. Some borrowers and lessors need the extra buffer of protection more than others.
In the following scenarios, it makes financial sense for you to pay the small premium for peace of mind that your loan will be paid off:
- You don’t put down a deposit on the car
- You put a very small deposit that doesn’t cover more than vehicle tax and title fees
- You trade in a vehicle with negative equity and roll it over into your loan
- You buy a model that depreciates faster than the average new car
- You choose a long loan term or you’re paying a high interest rate
Where can you buy GAP insurance?
There are a few different ways that you can buy GAP insurance. You have the first opportunity to purchase the supplemental coverage when you take out your loan.
The finance manager at the dealership and the loan officer through the bank will both offer you coverage. If you buy coverage like this, the cost will be rolled into the loan.
After you complete the transaction, you may receive offers from third-party GAP providers in the mail or through your bank. When you add the vehicle to your insurance policy, the company might ask if you want GAP on your auto insurance policy.
By choosing this option, you’ll pay for the coverage in your auto insurance payments.
If you’re buying coverage through your insurer, you might expect to pay a few dollars each month.
You have to do a cost-benefit analysis when you’re trying to decide if you need GAP. If you don’t have coverage now, you should compare premiums through car insurance companies.
Get comparison quotes online right here and you can see how affordable the extra protection is!