What is GAP Insurance?

Gap insurance (often times simply called GAP) is an optional coverage that most buyers should purchase. It protects you from owing money to the bank after the unfortunate loss of a vehicle. GAP can be purchased from the dealer and included with in your loan.

How does GAP work?

In the event that your vehicle is demolished in a traffic accident, stolen, or otherwise determined to be a total loss, your auto insurance company will assess their value of the car. Unfortunately most of us are all too familiar with the scenario that follows:

1. The insurance adjuster calls and tells you how little they are going to give you for your vehicle.
2. You pick yourself up off the floor and plead with them that the bluebook is much higher than their figure.
3. They inform you that they assess their own value of your vehicle completely independent of the bluebooks.
4. They remind you that the rental car they had been paying for will need to be returned by tomorrow or you will need to pay for it yourself.
5. You eventually accept less than what you think you should get.
6. You realize that you owe more money on your car than the insurance company is going to pay out.
7. The insurance company sends their funds to you bank and your bank sends you a letter requesting final payment of the remaining balance of the loan.
8. You realize that you can not afford to pay them off and still get another car.
9. they don’t get your money and they report the loan as an unpaid charge off which looks like a reposession on your credit.

Here’s where GAP comes in to save the day

Let’s pretend that you have a loan balance of $10,000. You have been making your payments perfectly and things are good. Somebody runs a red light and T-bones you causing enough damage that your car is totalled. Then the insurance company calls to tell you they are sending a check for $6500 to your bank to pay off you totalled vehicle and you find yourself at step 1 of the unfortunate process above. If you have GAP you can skip all of the remaining steps. The Insurance company will send their funds to your bank and the GAP insurance company will send your bank enough funds to bring your loan to a zero balance!
This results in a “paid as agreed” account on your credit instead of a “repo”.

Should I get GAP?

The nature of loans is such that your balance will fall less at the beginning of the loan than toward the end of the loan. Your car will depreciate continually from the very beginning. The longer term you select for your loan, the slower your balance will go down, but the car will depreciate at the same rate.

If you are buying a car chances are you are financing it. If you are financing a car chances are you put as little down payment as possible and took out a loan with as long of a term as possible. You SHOULD get GAP!

Unless you are putting a significant amount of money down, and going for a short term loan You SHOULD get GAP!

If you put enough cash down that you are borrowing less than what an insurance company would pay if the car was totalled you may not need GAP.