Don’t Finance a Vehicle without GAP Insurance

by Mike on May 19, 2010

According to CNW Marketing Research, 70.5 percent of people finance their cars. Those with higher interest rates, longer loan terms (60 months or more), and little to no down payment may find themselves in a situation where they are underwater with their vehicle. In other words, more is owed on the vehicle than it is worth. According to Edmunds.com, 40 percent of Americans with auto loans find themselves in this situation.

Imagine the following scenario:

  • You owe the bank $15,000 on that loaded SUV you bought a few years ago
  • You are in a car accident that wasn’t your fault
  • Your car is totaled. Your insurance company sends an adjuster and determines your car’s value before the accident to be $9,000
  • A settlement check is paid to the bank for $9,000.

This is where the story gets interesting….

The bank is short $6,000. It’s not their fault your car was totaled, they are money they loaned you. So who pays the bank?

Without GAP insurance….YOU DO.

I don’t know about you, but I would not be happy about paying on a vehicle that I am no longer driving. Also, more than likely you’ll have vehicle replacement expenses. If you have GAP insurance, they will pay the difference between the appraisal value of your vehicle and the amount owed to the bank. This is the situation I was in. The numbers are made up, but the story is true. GAP insurance is covering the difference on my totaled vehicle so I don’t have to.

What is GAP?

Guaranteed asset protection insurance (or GAP Insurance) is an insurance coverage offered as a supplement to automobile insurance policies. It provides financial protection from certain types of loss that are not covered by standard automobile insurance. GAP is designed to cover the unpaid balance of an automobile loan in the event of a total loss of the vehicle. GAP covers the difference between the depreciated actual cash value of a lost vehicle and the outstanding loan balance on the vehicle. The coverage may also include payment of the physical damage deductible. (Source: Wikipedia)

Who needs GAP Insurance?

  • Buyers financing a new vehicle with little to no money down
  • Buyers with long term loans
  • Anyone who leases an automobile. With leased vehicles, there is always a gap between what the bank is owed and the vehicles actual value

Who may not need GAP insurance?

  • Those financing a used vehicle as the vehicle’s depreciation rate has slowed down
  • Those with a large down payment or shorter term loans

Who DOES NOT need GAP insurance?

  • Buyers paying cash. GAP is only to cover the difference between the fair market value and the amount owed to the bank.
  • Buyers covered by their auto insurance. This is rare, but some insurance companies offer this protection. Double-check so you don’t pay for duplicate protection.

What about you? Do you have any experience with GAP insurance? Tell us about it in the comments

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{ 8 comments… read them below or add one }

Wanda May 19, 2010 at 1:17 pm

My sister was in a similiar situation so I opted for the gap insurance when I purchased my car a few months ago.
.-= Wanda´s last blog ..You’re Unforgettable =-.

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PF Journey May 19, 2010 at 1:20 pm

Yea, insurance is one of those things that is under appreciated until its needed.

The key is also not to spend so much money on coverage that you’ll hardly use.

But with the amount of people financing cars….GAP makes sense

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Joseph | kickdebtoff May 19, 2010 at 5:13 pm

Wow! it certainly does make sense to have GAP insurance if you are to finance a car…. but again financing anything with zero down should be a NO! NO!

Insurance companies are one of those necessary evils…(if i may call them so..) you just do fine when you have the coverage it but once you decide to cut ties with them … something happens and you end up regretting why you did not have the coverage.
.-= Joseph | kickdebtoff´s last blog ..10 Ways You are Getting Ripped Off =-.

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Lakita (PFJourney) May 19, 2010 at 8:00 pm

Agreed on all fronts!
.-= Lakita (PFJourney)´s last blog ..Don’t Finance a Vehicle without GAP Insurance =-.

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Deacon Bradley May 24, 2010 at 12:16 pm

In my opinion the “necessity” of purchasing GAP insurance should be a big warning flag: you’re buying too much car. Committing future earnings to payments on a depreciating asset is not the way to win. You’re already over-paying enough for a car by financing it without the GAP insurance.

Further, the need for GAP insurance is the highest when the loans are the most expensive (longest). While it is a legitimate insurance business, the target market leaves me feeling a bit suspect about the product. In essence you’re paying for an expensive loan, and paying more so you can sleep at night with that expensive loan. Who’s really winning here?
.-= Deacon Bradley´s last blog ..Wealth, the Key Ingredient =-.

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Lakita (PFJourney) May 24, 2010 at 12:31 pm

Good points Deacon,

But I’m not sure I’m ready to lump them in the category as other predators such as “pay day loan companies”. Take another look at those percentages, a high number of people are financing because as Dave Ramsey likes to say “normal is broke”.

The reality is, some people don’t want to or don’t think it’s possible to “drive free – retire rich”. They are content with car payments being a part of life. For those individuals then having the protection of GAP is a must.

I’ve admitted that purchasing my vehicle was the dumbest financial move I’ve made to date. If I knew then what I know now, there is NO WAY that would have happened. (Live and Learn!) Fortunately, I had the GAP protection and it served its purpose when my car was totaled.

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Deacon Bradley May 24, 2010 at 12:41 pm

I’m glad it saved you Lakita! I agree that most people probably think of financing cars as a necessity (I know I sure did!) so it likely seems like a great product. Thanks for sharing your experiences so we can all learn and get better.
.-= Deacon Bradley´s last blog ..Wealth, the Key Ingredient =-.

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DMCCALL October 13, 2011 at 1:53 pm

I know the situation all too well. I financed my car thru my credit union. I was in an accident in October 2009, my car was totaled. I believed the value was there and my car would be totally paid off, never doubting that. But when my insurance company declared the car a total loss and provided me with the value, I was devastated.
I did not take Gap because i did not think I would need it, but I did. My vehicle was appraised at $8870 and I still owed a balance of $10800. I spent the next 5 months paying off this vehicle I no longer had and driving my mom’s car to save some cash.

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