What Is GAP Insurance And Do Car Buyers Really Need It?
GAP insurance applies in situations of auto accidents that rule to total losses of the vehicles. It provides payments for the difference between what the insured person will get from the insurance company and the amount of the noticeable loan owed to the lienholder (bank providing the loan) on that means.
First it should be stressed that GAP insurance is not part of the law. You are not required by any law to get GAP insurance. Some lienholders prefer to see you having this kind of insurance when there is a wide gap between what the insured person owes to the bank and what the company will pay. Lienholders have less worry that their loan will be paid off when the insurance company pays less what you owe to the lienholders.
Examples of GAP, and where the GAP insurance is mostly needed:
Example 1. You buy a brand new auto at $50,000 and because of your great credit the car dealer let you go without making any down payments. Ten months later your auto got stolen, and you were left with a $45,620 loan. The auto insurance company argues that the market value of your auto, which now has 42,000 miles, is only 35,600. In this case, $6,400. Your GAP coverage, if you have it, will provide that amount.
Example 2. You choose to buy a used SUV and the best offer you negotiated with the used car salesman was $17,500. You knew that you are paying $4,000 additional because the truck came with nice DVD player, TVs, sound system, and very nice looking rims (all are not part of the commonly insurable value of the truck with the auto insurance company.) Because of your less than perfect credit the lienholder charged you an APR of 25% on the loan. You made only $2,500 down, keeping you with a loan observe of $15,000. After a year you got into a automobile accident and your SUV was a complete damage. You insurance company decides that the value of the high mileage truck with all the not-insured extras was only 7,500. After making payments for a year, your balance is nevertheless $12,500. In this case we have a gap of $5,000 that you will be paid by the GAP insurance, if you have it.
Who needs GAP insurance? Generally people who are over pay for a means, or make small or no down payment are the people who will have some sort of GAP. Also people who buy high mileage vehicles or over used vehicles, at a price that seems to be close to the Actual Cash Value of the means will also have GAP. Some insurance companies will underpay total loss claims for overused vehicles (vehicles with much higher than the average mileage.) Also, if your loan has very high APR chances are higher that you are paying off your loan at a very slow speed at the same time your car is steadily depreciating, leaving you with a GAP. Another class of people who need it are those who cannot provide the GAP in the event of total loss.
Your used/ new car dealers may offer you GAP insurance. Remember that GAP insurance is not mandatory, but it’s good to have if you really need it. However, before you get your GAP insurance at your dealership you need to get some general idea if you need it or not. Call your insurance agent and see what’s the value of the car in the books. You can also use Kelly Blue Book to determine the value of your car. Then based on the amount of loan you are borrowing on it you may be able to figure out the approximate amount of GAP that you will have, if there is any.
GAP insurance runs from $250 to $600 for the life of the loan. The majority of GAP policies can be cancelled within specific period of time, and you may (or may not) get some refund, after paying all administrative cost and commission, assuming that you remember to cancel, and you know how to do it; in the event you sell your car or payoff the loan prematurely.
For someone who purchases a brand new luxury car with no down payment and with a possible GAP of $12,000, it may be worth it to pay $600 for GAP insurance. But for someone else who buys a $6,000 used car with a possible GAP of $1,200 it will not make any sense to use $350 to get GAP insurance. If you decide to get GAP insurance, try to acquire several prices before you sign on for that coverage at the car dealership. There are than enough websites that will provide you with a competitive price for GAP insurance.