What is GAP Insurance? Should I Buy It?
What Is GAP Insurance?
GAP Insurance is an insurance product sold by dealerships in the F&I or Business Office. Dealerships charge customers a flat cost (typically $600-$1,000) that gets spread out over the course of the customer's loan.
GAP Insurance is designed to protect customers from owing money on a vehicle that has been totaled. Take a look at the graph below. Imagine you took a loan on a vehicle for $25,000. 3 years later, the vehicle is totaled (vehicles can be totaled because of serious accidents or theft). Your insurance sends your bank/credit union $10,000 (the value of the vehicle), but you still owe $20,000. GAP Insurance would send the left over $10,000 to your bank/credit union, so you're not on the hook for it.
Do I Need Gap Insurance?
GAP Insurance is definitely a case-by-case scenario.
Cases where you would be less likely need to need GAP Insurance --
- Trading in a vehicle that you have positive equity
- Putting a significant down payment down
- Purchasing a pre-owned vehicle
- Taking a shorter term loan (such as 48 or 60 months)
- Financing at a lower interest rate
Cases where you would be more likely to need GAP Insurance --
- Trading in a vehicle that you have negative equity
- Putting little or no money down
- Purchasing a new vehicle (will depreciate rapidly in the first 2 years)
- Taking a longer term loan (72+ months)
- Financing at a higher interest rate
If a customer is interested in GAP insurance, we've been able to negotiate the dealer down to $500. That equates to $7.60 per month (based on a 72 month loan at 3%). For $7.60 per month, you save yourself a lot of headache if your vehicle is totaled or stolen.
Another little known fact, is that GAP can be cancelled at any time, and a prorated refund will be sent to your bank. We recommend to our clients who do want to purchase GAP insurance to monitor their approximate trade-in value and payoff after a couple of years. Once they reach a point that they're trade-in value is equal to or greater than their loan payoff, they can cancel their GAP insurance, which will lower the amount they owe on the vehicle. If they end up keeping the GAP insurance for 36 months, it ends up costing them about $250 or so.