Gap Insurance, what is it, do I need it ?

Gap insurance is a very common misunderstood policy, and most buyers really have no idea of what it is.  It is really simple, and fairly easy to decide whether you should buy a policy.

  • Purchase price
  • Loan balance
  • Term of loan

Purchase price:  when you compare your purchase price to the online Kelley Blue Book values where do you land.  Closer to wholesale-tradein, private party or retail, if your purchase price is less then the private party value, by 10 to 20 percent, you probably do not need gap insurance.

Loan Balance: are you putting money down.  If so and  your loan balance puts you below the private party amount by 10 to 20 percent you probably don’t need gap insurance.

Term of loan.  Most of today’s 60 month auto loans will take about 39 months to hit where the loan balance equals the quick sale value (or insurance pay off) of the vehicle. (If you did not over pay for it to begin with) That period of time is where you are most vulnerable.  If your borrowing your money for more then 24 months and depending on your loan balances, you might consider buying the Gap insurance.

If your vehicle is wrecked or stolen during that time period, is having to come up with possibly thousands of dollars going to cause hardship on you and your family, if so I would seriously consider buying Gap insurance.

Gap Insurance for  your auto

Gap insurance, covers the upper portion of your auto loan in case of a totaling accident or theft.  For example say you owe $10,000 but for insurance payoff they would only pay $8,000.  If your vehicle is totaled or stolen you could be left owing the lender that extra $2,000 dollars.  Gap insurance covers that upper liability and is a one time cost.  Costs for Gap with credit unions will run around $200 plus or minus.  With autodealers can run $500 to $700.

There are times, I feel Gap insurance should be mandatory, for example when trading in an old car with negative equity and getting a new car.   Many of these cases the end sales price financed will be way above the value of the new car.  Often as much as 4 or 5 thousand dollar. In that case, a person should take a very serious look buying Gap insurance.

Quick Insurance Resolution

An example of how Gap insurance works after the fact.   A credit union member totalled their car, called me wanting to get something quickly.   In many cases it can be weeks before the insurance company deals with your mishap and cuts a check, so possibly weeks before you could finalize a new car.   With Gap insurance the Credit Union gave us the “go ahead” , because it didn’t matter what the insurance company paid, they knew the GAP insurance would pay for any difference if there was a negative.

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