You need to be aware of your GAP if you ever plan to purchase a new car and finance it. It’s obvious what happens when you buy new cars. By the time you get your car home, it’s already 25% less. It’s worth about half of what it was after 18 months. But how much are you still owing? Your GAP is the amount you owe on your car. You could end up paying a lot of money for the GAP if you cause an accident with that car.
This is how it works: Your insurance company will pay what your car is worth, even if your OOW is higher than the value of your car.
Example: Joe trades his 2005 Dodge Ram for a 2010 Chevy. The dealership adds $1000 to the purchase price of his new loan because he owes more on his Dodge than it is worth. Joe’s new car will cost him $25,000 plus $1,000 from Dodge. That total is $27,976 + tax. Joe pays $2,500 down payment. He has a balance of $254,476 to finish the car. Joe is left with $21,655 after a twelve-month period. Joe is written by the insurance company (actually, the finance company since they still own the title) for every dollar the car is worth. The check includes a $14,500 deductible ($500) and $14,000.
Who is responsible for the $7,000+ difference in price? Joe, you guessed it.
This is a daily occurrence. The insurance company did their job and paid what the car was worth. You are responsible for paying more than the car is worth. You are responsible for paying what you owe.
GAP insurance: You need GAP insurance if you can picture yourself in Joe’s position. It covers you against any gap between the car’s value and your owings. In the above example Joe’s insurance company would pay Joe the car’s value plus the $7,000+ he owes. GAP insurance can be purchased through either the dealer that sold you your car or through your agent. But, you will pay 300% more for one of these two options!
Through the dealer: GAP insurance is one of the largest up-sales at the dealership. GAP insurance is usually around $400 and they charge you a lot to get it. Then, they add it onto your financing. You will end up paying $470 for $400 financing over five years at 5.5%. It’s still a good deal compared to the $7000 Joe was forced to pay, but it’s far more than you should be paying. GAP insurance is not something you should purchase through a dealership. Instead, go to your local professional insurance agent and get it for a fraction the price.
You can add GAP insurance directly to your car insurance for $12 per six months. The same coverage and protection are available, but it costs $120 over five years. This is a $350 savings just by buying GAP insurance from another source. Your GAP protection can be affected by leasing or buying. Make sure you inform your insurance company.
You’ve made a smart financial decision when you can save $350 and get the same protection. GAP insurance is something you should consider if you have the need. However, you shouldn’t buy it at the dealerships as you will be overpaying.
