This past weekend, my wife and I went car searching. While it may seem like a daunting task dealing with used car salesman, I find it kind of fun. I suppose it becomes a little less stressful when you can easily walk away from any deal since there were no time constraints for our search of the perfect car. My wife knew what she wanted and we test drove several vehicles before choosing one. After the offer became final, the extra services came pouring out of the salesman’s mouth like roadside assistance coverage, an extended warranty, maintenance packages and GAP insurance. I was vaguely aware of GAP insurance and decided to dissect whether or not it would be worth it in our case.
GAP insurance, what exactly is it? If your vehicle becomes a total loss, whether it be an accident or mother nature, GAP insurance will pay the difference between the actual fair market value of vehicle assessed by the insurance company and the current outstanding balance on your loan or lease. Basically, it’s piece of mind that you wouldn’t have to pay anything additional if you had negative equity in your vehicle, including any deductibles that may be in place. At the surface, it doesn’t seem like a great deal, but it could be beneficial depending on the vehicle you purchase.
GAP insurance, from my research, tends to be in the range of $8 – $12 per month for the life of the loan. It is also typical that GAP insurance can be canceled at any time (however, there may be additional fees) during the life of the loan. In our case, GAP insurance was $604 (paid in full) over 60 months, not including the finance charges that we would incur over that time. We were allowed to cancel and the remaining prorated balance would be credited back to us.
So what to do? Is GAP insurance worth it or is it just another quick buck for insurance agencies? As with anything, it depends on your situation. A few reasons that GAP insurance can be a good option for you:
Longer loan terms. With a 72 month loan, for example, means that with your lower monthly payments, you will build equity at a slower pace.
Putting no money down. Once you drive the car off the lot, whether new or used, you car has already lost significant value.
Depreciation. Not only does your car lose value right off the bat, but some new cars lose as much as 30% within the first year!
Adding additional services to your loan. You may be financing your car, but you also could be adding an extended warranty, paint coverage, maintenance packages and don’t forget tax, title and license that is added to your loan. You are almost assured you will be upside down before even leaving the dealership.
Insurance deductibles. If you have a large deductible, such as $1,000, to save on insurance premiums, GAP insurance will most likely cover the difference in the event of a total loss. Check the details to make sure the GAP insurance policy does indeed cover the deductibles as some may not.
An example how negative equity easily occurs:
- 100% financing
- Buy a new auto for $20,000
- Tax, title and license costs $2,000
- Several packages totaling $1,500
- 60-month auto loan (@ 6.5%) for $23,500
- Insurance deductible of $500
After 1 year, the remaining balance of the loan with a monthly payment of $391 would be $18,800. In this example, we’ll say the vehicle lost 20% of it’s value since being purchase putting the fair market value of the vehicle at $16,000. In this example, including the insurance deductible, you would be responsible for $3,300. If you had GAP insurance coverage, the $3,300 would be taken car of.
Unsure of what to do? Check out Kelley Blue Book online to find out the value of the car and look at how the car you are looking at depreciates historically. It’s also a great tool for negotiation purposes!
After crunching the numbers for our situation, it turned out to be a wash after 6 months of owning the vehicle making the minimum monthly payments. If were to put the $604 GAP insurance premium towards the loan, it would only be about 4 months to break even. In the end, we decided against it for our situation since the car we purchased was four years old, we made a 15% down payment and the car (Honda Accord) has a history of reliability and good resale value.
I’ve seen others claim that GAP coverage is a scam, but I can see the value in it if you do your research for your given situation and especially if it is a 100% financed new vehicle. Do you feel GAP insurance is worth it when purchasing a car?