GAP insurance is always recommended by the dealership or lender, but how do the benefits of it add up to the extra cost?
If you’re new to the car buying game you may not have ever heard of GAP (Guaranteed Auto Protection) insurance before, but many times it’s either recommended or required for your loan. This insurance is used if you were to crash your car and it is deemed totaled by your primary auto insurance company. GAP insurance covers the value of your vehicle and how much you own on the loan, while sometimes it will even cover your deductible.
The moment you drive your new vehicle off the lot the car depreciates and loses some of its value because it is now “used”, and many times your primary insurance policy is not enough to cover you financially if you were to wreck it. Your regular car insurance is used to pay the lender the vehicle’s value before the crash happened, not to cover what you still owe on it. If you have recently financed or leased a car, truck, or SUV chances are that difference is thousands of dollars.
For example, say you bought a car that was $20,000 and within the first year you crashed and totaled it. Your insurance company would then pay the dealership or lending company what the value of your car is at that time, which often times is about 10% lower than what you paid for the car. Let’s say they pay your lender $18,000, which means you are now responsible for coming up with the other $2,000 to cover the loan balance. If you have GAP insurance you don’t have to worry about that cost.
Who Should Buy GAP Insurance?
This is a great deal for people who need it, but not all car owners should buy GAP insurance. For example, if you own your car outright, meaning there is no lien holder on the title, then you don’t need to purchase this extra insurance. If you total your vehicle when you own it outright then your primary insurance company will pay you for the value of vehicle. You don’t have to worry about paying anyone else off with that money, so you can use it as a down payment on a new car.
If you have a lot of equity in your car then you, too, are not a candidate that needs to purchase GAP insurance. You gain equity in your vehicle by paying the loan down quickly, or by having a large down payment so you owe less than what your car is worth. Totaling your vehicle is never a good thing, but if you have equity in it when you do then the amount your primary insurance company pays to the lender will cover your loan balance and you can use the rest as a down payment.
The buyers that are generally good candidates for Guaranteed Auto Protection are buyers who have negative credit history and received an auto loan for people with bad credit. These loans typically come with inflated interest rates which means more money is going to interest and less is going to paying down the balance of your loan. Other good candidates include:
- Those who lease a vehicle
- If you have an auto loan for 60 months or more
- Anyone who puts less than 20% down
- People who roll negative equity into a new car loan
- Drivers who put more than 15,000 miles a year on their car
- Vehicle owners whose cars have high depreciation histories
Where Can You Buy Extra GAP Insurance for Your Car?
If you believe you are a candidate for GAP insurance you may be able to find it at a few places. The first place you can look is at your lender or dealership you bought the car from. Generally, these places have third party companies that they use to offer the insurance to people who want it. If you buy a vehicle from a dealership that is requiring you get this insurance they must offer it through a third party insurance company.
If the lending entity you are using does not offer this choice, contact your current insurance company. Almost all of the big companies offer guaranteed auto protection as an add-on to your current policy. Either way you choose to go about buying the insurance, both parties will be able to help you decide how much protection you should get.
What’s the Cost of GAP Insurance?
GAP insurance shouldn’t cost you a big chunk of change. Generally, it is cheaper to purchase as an add-on through your insurance company than it is to buy it through the dealerships. It is calculated differently by each company, but the rule of thumb is that is about 5% of you premium for collision and comprehensive coverage. So, if you have a $1,500 premium for the year and $500-$600 is for collision and comprehensive your GAP insurance should run about you $30-$40 for the year.
Remember, GAP insurance works like a regular insurance policy so as your vehicle ages and you need less and less comprehensive and collision you will need less coverage from GAP, too.
As We See It
Buyers who are in the position of getting poor credit auto loans should look into also purchasing GAP insurance. At Auto Credit Express we can help you find a dealership in your community that is offering both new and used vehicles to buyers with less than perfect credit, and they can help you calculate how much GAP insurance will cost you on top of your loan. Get started today by filling out our free, easy, and secure online car loan application.