How to Decide if You Need GAP Insurance
Are you planning on purchasing a car soon? To help save time during the car buying process, you’ll want to know about a common back-end product called GAP insurance. In this blog, we’ll go over what it is and if you really need it.
What is GAP Insurance?
Guaranteed Asset Protection (GAP insurance) is a common back-end product that dealerships offer at the sale of your car. GAP insurance covers the difference between what you owe on your loan and what your car is worth if it is totaled or stolen. Read our blog to learn about other back-end products dealerships may offer when you purchase your car.
When GAP Insurance Makes Sense
Not everyone needs GAP insurance, but here are some situations where it’s worth considering:
- You made a small down payment: If you put a little amount down on your car purchase, your loan balance may be higher than your car’s actual value for the first couple of years. GAP insurance would be able to cover that balance if something happens to it during the first couple of years owning it.
- You have a long loan term: Loans stretched over 60, 72, or even 84 months mean slower equity build-up, leaving a bigger potential gap. GAP insurance could help you if someone totals or steals your car.
- You’re financing a brand-new car: New vehicles lost value quickly. Sometimes they lose as much as 20% in the first year. That fast depreciation can create a gap between what you owe and what insurance would pay.
- You’re rolling over negative equity: If you carried debt from a previous vehicle into your new loan, GAP coverage can protect you from being on the hook for that leftover balance.
When You Might Not Need GAP Insurance
On the other hand, GAP insurance may not be necessary if:
- You made a large down payment or paid for the car in cash.
- You’re financing a used car with slower depreciation.
- Your loan term is short, and you’ll pay down the balance quickly.
- You already have enough savings to cover the difference if something happened.
Things to Consider
GAP insurance isn’t required, but it can be a smart financial safety net in the right circumstances. Consider your down payment, loan term, and how quickly your car may lose value.