Purchasing a new car already puts you in debt and then the dealership asks you whether you want to include auto gap insurance for your vehicle. It sounds like a wise decision to protect your investment, but in the back of your head, you can’t help but wonder: is it worth the money? Let’s consider how auto gap insurance works and examine if it’s worth the extra cash.
Why is there a gap?
While gap coverage may make you think there’s a gap in your current policy, “GAP” is an acronym meaning “Guaranteed Auto Protection.” This term means that you’ll have guaranteed auto protection against your car being totaled after an accident. If you think your current insurance will pay for your vehicle if it’s totaled, think again. Your auto insurance pays for the value of your vehicle at the time of the accident. Since your car begins to depreciate after you drive it off the lot, you may be stuck paying on a loan after the vehicle has been totaled.
For example, say you purchase a vehicle for $25,000 with a 5-year term at 6% interest. After one year, your balance is still $20,580. When you get in a car accident, your vehicle is valued at $19,000. The amount your auto insurance is willing to pay is $18,500 because you have a $500 deductible. That leaves you owing the extra $2,080 on the loan even though the vehicle is totaled. Gap insurance will cover this amount.
Is it worth it?
Of course, your question becomes, is auto gap insurance worth it? While you may want to purchase it, the dealership charges around $500-$700. This amount adds to your existing loan. This option isn’t the best decision as you’ll end up paying interest on this sum. The best choice is to go through a credit union or your current auto insurance. Not only will it be cheaper, but you may also find better terms after you read the policy.
Another reason gap insurance may be worth it is if you purchased a luxury vehicle. After you drive off the lot, your car depreciates 11% on average. The more expensive the auto, the more of a loss you’ll experience. In the first year, you’ll lose 25% of the value, which can be tens of thousands of dollars. If you purchase gap insurance with your luxury vehicle, you may find that your insurance policy covers your vehicle and even buys another car of the same make or model. This is why you should read your policy to ensure that your gap insurance works for you to cover any out-of-pocket expenses.
