What is GAP insurance and why do you need it?
GAP insurance covers the difference between what your insurance pays when your car is totaled or stolen and not recovered and the amount you still owe for the car. The fact is that when most people drive a new car off the lot they owe more then the car is worth because the second you drive it off the lot is is a used car and it depreciates in value. Also people tend to put down less of the cost up front as a down payment so they owe more as a percentage of the cost of the car.
Unfortunately many people continue to owe more then the car is worth thru out the life of the loan. This is often due to the length of the car loan. To keep the monthly payment down many people take out 5 and 6 year loans – 60 and 72 months. With long loans like this you are paying more in interest each month and less in principle each month. So you pay down the balance of the loan slower. Meanwhile the value of the car is still depreciating at its regular rate – meaning the car is getting older and racking up the miles. So it is becoming worth less faster then you are paying off what you owe!
How do I get Gap Insurance Coverage for my Car?
There are two basic ways:.
The first type is an actual insurance policy sold by a licensed insurance broker. We have links on this page for Ads from GAP insurance providers. Here are a few that I researched that do and don't provide gap insurance
- Progressive offers GAP insurance
- ALLSTATE offers GAP insurance
- GEICO does not offer GAP insurance
- BUT these are the ones that are often sold thru the dealership – along with the extended warranties- when you buy your car.
- But watch it.; From what I have seen they have a lot of flexibility in the pricing and will tell you the high price first. Then if you challenge them on it they come down to a better price. just like when you try to negotiate buying a car!
What are the basic rules for GAP insurance?
Coverage is usually financed along with your lease or loan.
It only kicks in if your car is made a total loss by your insurance company. (who usually uses a third party appraiser to determine a total loss).
SO it DOES NOT help you if you go to trade your car in and it is worth less then you owe!!
There are exclusions and rules to GAP insurance that may depend upon the state you live in.These usually involve the length of the loan, the maximum amount of the payout. Also there may be provisions in GAP agreements making them not eligible for finance agreements where less than 80% of MSSRP for a new vehicle or NADA average retail value for a used vehicle is financed.
Some finance companies will require that you purchase GAP as a condition to obtaining a loan for a car.
Read more about GAP insurance at Wiki
The Terms – Cost – Coverage
In some states, such as Indiana, each GAP program must be approved by the Department of Financial Institutions to be offered as an additional charge.
Programs approved generally have a 30 to 60 day "free look period" allowing the consumer to cancel the program if they get home and decide they don't want it.
Some programs allow for a rebate of the GAP cost if the account is prepaid in full. The rebate is usually on the Rule of 78s basis.
Costs of the programs range from $225 to $420 with an average cost of around $375-$390 depending on the various provisions of the programs.
MANY DEALERS QUOTE YOU THE MONTHLY PAYMENT for gap. So if they say its $10 bucks it is probably $10 a month – $120 a year, Multiply that by the length of the loan to learn the total cost!
In other states, GAP is an insurance product and is handled the same as credit life and disability insurance products.
Other Tips
If you're told you must purchase a GAP contract to qualify for financing or that it is a requirement, the cost of the GAP program cannot be an additional charge and must be included in the finance charge and reflected in the disclosed Annual Percentage Rate. The program must be optional to be an allowed additional charge.
If you decide to buy a GAP product through a car dealership — the agreement is backed by an administrator and/or a third party — make sure the dealer forwards your payment and gives you written confirmation. Contact your state agency that regulates the GAP product if you have reason to believe that your GAP program wasn't put into effect as agreed.
So, what do you do when the GAP salesperson comes calling? Proceed with caution. Before you sign on the dotted line, get a full review of the program and its cost, and make sure your down payment or trade-in is low enough to result in a "Gap."
Check With Your Auto Insurer
Some companies provide extra coverage in their standard policies for the “GAP.” They may add 10% to your collision premium to pay up to 25% more than the car’s depreciation value. If you purchased a new car, some insurers will pay the full cost to buy a new car if you total your car within the first year and have driven less than 15,000 miles at no extra charge. Other companies may charge a flat fee of $14 to $20 per year for the coverage.
photo credit: Philipp Lücke via photopin cc
