Should I buy Gap Insurance when financing an auto?
Question:
Answer:
Here's the deal: the second you sign the dotted line for a new car the value drops 20%. The same time next year, the value plunges another 10 - 15%. This goes on for another two years, then the value levels off somewhat but still continues to drop. Should the unthinkable occur, such as a collision or fire/flood that totals your vehicle, you are left owing the remainder of the actual cash value and what you owe to the leinholder. This could be thousands and thousands of dollars. GAP will cover this amount owed, so if you are dumb enough (just kidding) to purchase a new car then GAP is a must.
Gap insurance is for when you are financing your car for more than the car is actually valued for. If you trade in a used car that you still have an outstanding loan on and the trade in value is less than the loan amount, you will have to make up the difference. Most people do this by adding the difference on the old car loan onto the amount they are requesting for the new loan.
When you insure your car, the insurer is only going to insure the actual value of the car, not the value of the loan. So, if you total your car, the insurance pays for the car's value, but you would be stuck for the "gap" between the value of the car and the amount left on the loan.
You should not buy it if there is no gap to begin with (no trade in).
After that, I'd probably buy it if I had a large gap, but not a small one.
Gap protects the lender. If you happen to have a serious accident that totals your vehicle, insurance will only pay the value of the vehicle, not the amount you have financed. If the value won't pay off the loan, you are responsible to keep making payments until the loan is fully paid. With gap insurance, the lender is paid the difference between the value of the vehicle at the time of loss and the amount of pay off left on the loan. If you are upside down in your loan, it's a good idea. Do the math for your situation and decide.
Well, if you're not putting anything down, or your down payment is small that's one reason to need it. The more you finance, of course the more you owe, but when the car depreciates and the loan is still so much you will probably need it. If you have a high interest rate along with that, there's another reason. If you were to have an accident right after you bought it, you'd probably be ok, but in some situations if your car is totaled, the actual cash value is less than what you owe. Then you're "upside down" on the loan. It's not a bad idea to have it if you are concerned about that. It is happening more and more these days. And insurance companies don't pay off your loan for you just to be nice- and your lien holder won't write off what you owe them since the insurance won't pay it all, just to be nice!
this is especially important when leasing a car
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