Gap Insurance: Advantages & Disadvantages
When you purchase a new or used vehicle from the dealership, you will probably be offered gap insurance when discussing car loan options with the finance and insurance manager. Gap insurance is a specialty type of car insurance that is used to provide coverage used to pay the difference between what a car insurance company will pay if a car is totaled in an accident and the amount that the insured driver owed on the vehicle. While there are certainly times that gap insurance benefits the owner of a vehicle, this type of coverage does have its advantages and disadvantages.
Advantages of Gap Insurance
Gap Insurance helps with lower down payments. Gap insurance is most beneficial to car owners who owe more on the vehicle than the vehicle is actually worth. If you purchase a vehicle with little or no down payment, chances are that you will owe more to the car lender then your insurance company would pay in the event of a major accident—even as soon as you drive off the car lot. In many cases, your new or used vehicle will have a real street value of between 20% and 30% less than the price you paid for it, and if you have an accident—you will have to pay the difference. Having a gap insurance policy can help you avoid paying hundreds if not thousands of dollars to pay off a totaled vehicle.
Gap Insurance also comes in very handy when you are purchasing a vehicle with a rather long loan term. When purchasing vehicles with loan terms as long as 5, 6 or even 7 years, it may be several years before you have any equity in the vehicle. A gap insurance policy will make sure that you don't have to come up with a large amount of money to pay off the loan in the event that your car is lost, stolen or involved in a major accident.
Disadvantages of Gap Insurance
Although gap insurance can be beneficial in some situations, there are also times when purchasing gap insurance might not be such a good idea. For example, if you buy your vehicle at a very low price, or make a significant down payment at the time of purchase, gap insurance may be unneeded and simply a waste of money. Depending on how much you pay for a vehicle, the amount of car insurance coverage may be sufficient to pay off an outstanding car loan. Likewise, making a large down payment of about 20% to 30% at the time of purchase will almost always ensure that you leave the car lot with at least a small amount of equity in the vehicle. So, when purchasing a vehicle under these conditions, you might want to consider declining the dealerships offer of gap Insurance.
Although gap insurance is usually inexpensive when compared to other car insurance policies, it still increases your overall cost of ownership for a vehicle. Making a substantial down payment or using a paid off trade-in vehicle will always establish equity in any vehicle that you purchase, and equity in a vehicle is always a better investment and better insurance in any vehicle that you purchase.
