What is GAP Insurance?
If your vehicle is ever totaled in an accident, did you know your auto insurance may not give you enough to pay off your loan balance? The minute you drive off the dealer’s lot, the value of your new vehicle starts to depreciate. In some cases it can take years before the value catches up with your loan balance. If your vehicle is totaled in an accident your insurance company may not value your car high enough to pay off the loan and you could end up making payments on a vehicle that’s sitting in a junk yard.
You can prevent this from happening by purchasing GAP insurance. GAP stands for Guaranteed Auto Protection and it can be vital for anyone borrowing money for a brand new vehicle. With GAP insurance, you don’t have to worry about whether your car’s value matches the loan balance. If your vehicle is totaled in an accident, this coverage will bridge the gap between what the insurance company says your car is worth and the actual amount you still owe on it.
Avoid this Common Mistake
When you buy your new vehicle from a dealership, the salesperson and the loan officer are probably going to try to sell you GAP insurance. They make it easy by adding the cost of the insurance to your loan so you don’t have to pay any money out of pocket. This small convenience could mean you end up paying a lot more than necessary. Not only is the GAP insurance through a dealership overpriced, but you’ll also pay interest on it until the loan is paid off.
So let’s take a look at what this can mean for you. The coverage from the dealer can cost $500 or more. Let’s say you finance your vehicle for five years at 10% interest. That’s an extra $50 dollars per year in interest just for the gap coverage. Add that amount to the initial cost of $500 and you’re spending $750 or more for coverage you may be able to purchase for a fraction of that cost.
Talk to Your Auto Insurance Agent First
Before you decide to add GAP coverage to your auto loan, be sure to check with your auto insurance agent first. Although it’s not advertised, many insurance companies offer GAP coverage for brand new, previously untitled vehicles. This is a special endorsement you must request at the same time you add your new vehicle to the policy. Surprisingly, you can often purchase this valuable coverage for less than fifty dollars a year. Compared to the price you’ll pay through the dealership, that’s a savings of $500 or more for the same coverage.
Another advantage to adding the coverage to your insurance policy is that you can remove it at any time. Once you’re confident the value of the car is higher than the loan payoff amount, you simply ask your insurance agent to delete the coverage from your policy. When you add the coverage to your auto loan, you’re stuck paying for it until the loan is paid off completely.