GAP Insurance – What is and Do You Need It?

If you have ever purchased a new car, it is likely that your sales person offered and even pushed Gap insurance or protection. If you financed your car and were to be totaled, this type off insurance covers the difference between what you owe on it and how much it’s actually worth. If you are unfamiliar with Gap insurance, you may be on the fence as to whether you would want to add this on. Of course, the more you know the better decisions you can make.

What is Gap Insurance?

For most vehicle owners, the costs resulting from damaged or stolen vehicles is covered by “normal” insurance, which most states require in order to have it registered. If you own or lease a vehicle and its cash or payout value is less than what you owe, that “gap” is the amount you would be required to pay out of pocket to your lender if the car is deemed totaled. While GAP protection is not actually insurance but rather a debt cancellation agreement, it serves to cover that difference between loan amount and value so that you don’t have to pay out of pocket if the car is no longer drivable.

Why There is a Gap?

With real estate and mortgages, you have negative equity when the value of the property is less than the loan amount. Real estate though, unlike vehicles, tends to go up in value so the need for Gap protection is not needed in situations where the property becomes uninhabitable for some reason. With vehicles, there is an immediate drop in value as soon as you drive it off the lot and this is known as depreciation. When combined with the fact that the first few years of monthly payments go towards paying down the interest on a loan, you end up with a situation where most vehicle owners end up with negative equity with their vehicles.

Additional factors such as taking out extended term loans that pay down the principle slower, putting little or no money down, and borrowing an amount higher than the purchase price to cover things like tag and title fees, service plans and extended warranties, all contribute to ending up with negative equity.

Should You Get It?

The answer to this question depends on your situation. You should ask yourself the following questions before purchasing Gap protection:

  • Does your auto insurance provider already provide some sort of Gap protection?
  • Would you be able to cover a $1,000 or more out of your pocket if your leased or financed vehicle were to be totaled?

If you choose to purchase Gap protection through your dealer, insurance provider, or a third party service, be sure to compare prices and plans. Just as with shopping around and comparing prices for auto insurance, know what you need and what you can afford. Remember though, not all services and plans are created equal so cheaper may not be better.