Don't get caught in the GAP- a buyers guide to GAP insurance for your auto
GAP insurance is relatively new to the industry. I tried to find an article to reference and agree with but it just seems so simple it's hardly worth using some other wise mans words. Here's the deal:
When you take out an auto note, say $23,000... If the vehicle is ever totaled (Total loss by insurance companies can include acts of god, stolen vehicle, fall asleep at the wheel, etc..) the insurance company only pays "Fair Market Value" for your vehicle. They don't base this on what you owe. Technically they base it on different things according to the insurance company you use, but the point is that they set the values, they ultimately hold the cards. If they decide the value is $5,000 less than what you owe.. Tough. You owe the bank the difference, and they don't usually like taking payments. Plus you still owe your deductible. So you are stuck with the debt. Even if they do accept the rest in payments, you are only then making payments on a car that you no longer own!
That's where the optional GAP insurance would step in. It will cover up to a certain percentage over and above what the NADA value is, plus most will offer to cover a portion or all of your deductible. Some even offer you cash back for a downpayment on your next vehicle.
The overall point I have seen after years of practice is that Gap sells for mere dollars added to your payment (dependant upon rate, term, etc) and CAN BE a very valuable asset. An insurance that you hope and pray you never have to use (who wants to total their car?) but an insurance that is well worth the buy, in the right situation.
That being said, as I usually advise: Each individual deal is different, and so is each GAP company.. GAP, being a type of insurance, is bought by the dealer and sold to the customer with the loan. Some banks even offer it through the dealer to help protect themselves from leftover balances. Each GAP policy is worded specifically (some cover higher percenteages of value than others, some offer extra "perks" like cash back to you for your next loan, etc..) but the overall point is that you do need to understand what type of GAP you are purchasing.
For instance (and it's taboo to mention to customers in my business) apparently there are insurance companies that have caught on to this burgeoning market of GAP insurance, and they actually offer it on their policy for an added charge. To be quite frank I only attempted to find out more about their specific coverage once and was met with a resounding "I don't have to tell you about my policies" answer from the otherwise kind insurance agent. So I don't know how their GAP compares to mine, but I will say this:
GAP is designed to protect you and the Bank from the insurance company leaving you the two of you to bicker about a deficiant balance. You can't totally blame the Insurance company, but do you really want them holding ALL the cards? Better to have an separate insurance company protecting you for around the same price. Or at least better to consider it before hand.
Just like with Warranties, GAP is not the right insurance for everyone (for instance if you are only borrowing half the value of the vehicle due to trade in or down payment) and you may not need it, but better to understand it going in. My own research would indicate that most "common folk" that owe money on their cars currently owe more than they are worth. Besides, one thing none of us can guess on is the market.
You'll notice that in most of my articles I say things like "In certain situations" or "CAN BE", "MAY BE" and so on... The reason I do this is because no two "car deals" are alike. After all, it isn't just a "car Deal" to you, it's your home away from home for the next 3-8 years, your safety cage from the outside world, your second closet, your quiet space... OH, and 10-40% of your income for the next X years! That has to be first and foremost when considering all the many facets of an auto purchase. I always advise first and foremost to:
"Find a car you like at a price you can afford from a dealer you trust".. Sound familiar?
Illustration of where and when the GAP occurs
Link to reputable GAP protection
- Chase One GAP Plus
This GAP protection is available through the dealer, and it is the brand I use. It has many benefits and is insured by Allstate.
- Gap Insurance by Driver Select
Advertisment: Online GAP source, Our plan includes the gap coverage, deductible coverage, extra special theft benefits, roadside assistance, and rental coverage if your vehicle is a total loss.