What is GAP?
GAP pretty much does what it says. It covers the gap. The gap between what? You might be thinking. It covers the difference between the amount owed on your vehicle and the actual cash value if the vehicle were totaled.
Why would there be a difference between what I owe and what it’s worth?
Well, cars are mostly depreciating assets, which means, they lose value, every day. Even if they are not being used or driven.
Most vehicles these days are purchased with financing through a bank or financial institution. With all the new technology, vehicles are becoming more and more expensive. Banks are offering terms as long as 84 months (7 years). In some cases when you spread the payment term out that long, the payments may not be enough to cover the depreciation.
For example, say you bought a car for $30,000 and over 84 months the payments are $440/mo. The vehicle may be depreciating at a rate of $500/mo. This could potentially mean your vehicle is going into negative equity.
Insurance only pays market value, not what you owe.
If your vehicle ends up stolen or totaled, auto insurance will likely only pay for what the cars current value is. The value is ‘fair market value’ or ‘actual cash value’. This means if you are already in negative equity, you could still be paying on a vehicle that you no longer have. Say you bought a car for $30,000, it gets totaled and your insurance says its worth $23,000, but you owe $28,000. You are responsible for the $5,000 difference. Unless you have GAP, which will cover that $5,000 difference. In some cases, it may also cover your deductible.
Do you really need it?
It is all about risk. Whether you really need GAP or not depends on whether you willing to take that risk or not. How ‘upsides down’ are you on your vehicle?
Do I need GAP?
Consider the coverage when;
- You are spreading the loan term of your vehicle for more than 60 months,
- The interest rate on your loan is high,
- A large down payment is not made during purchase,
- You are carrying over negative equity from a previous trade,
- Your vehicle depreciates more than average.
When GAP won’t benefit you
If you own your vehicle outright or are paying all cash for it, then you would not need the coverage. Putting down more than 20% cash towards your vehicle at the time of purchase in most cases should avoid the need for GAP. Some auto insurance companies have policies available that will cover the difference, in this case, you would not need GAP either.
Where can you buy GAP?
You can buy the coverage from the business or finance manager when you purchase your vehicle at a dealership. Banks, credit unions, financial institutions may also offer the coverage. Pricing is anywhere between $400-1000 and this covers you for the entire term of your loan on the vehicle. The cost of it can be added to your finance agreement which will add a couple bucks to your premium (depending on the term). GAP can only be purchased at the time of initiating a new loan.