Do I Need Gap Insurance? In the case of cars, gap insurance covers the difference between what you owe on your car loan and the actual cash value of your car if it was accumulated in an accident. This “gap” can amount to a large amount of money, which you will have to pay out of your own pocket – especially if you did not cut a lot of money when buying the car (less than 20% or so) or take out a long-term loan (for example example, for more than five years). While the cost of gap insurance varies greatly with the vehicle, it is often $20-$60 a year, and you usually only need it for the first few years. Here’s how to determine if you need gap insurance for your vehicle.
Do I Need Gap Insurance?
Should I get Gap insurance?
If you owe your car more than it’s worth, it’s called “upside down” or “underwater.” This can happen very easily because a new car tends to drop quite a bit in its early years. Furthermore, if you take out an interest loan, a disproportionate amount of your early monthly payments usually goes toward paying off the total amount of interest owed over the life of the loan rather than paying off the principal of the car. (Towards the end of the loan, it reverses.)
For many people, gap insurance only makes sense for the first few years of ownership while the loan is being paid off. Ultimately, the amount you pay toward principal will reduce the amount you still owe to less than the value of the car, eliminating the need for gap insurance.
For example, if you take out a $20,000 loan on your car and pay off $12,000 of the principal – leaving $8,000 to go – and the car is worth at least $8,000 if combined, you will no longer need gap insurance. but, it’s important to remember to subtract your deductible from what the insurance company says is the value of your car, as the deductible can easily be between $500 and $1,500 or more. In the example above, if you have a $1,000 deductible and your car is worth $8,000, you might want to keep your gap insurance until you have $7,000 left in the principal.
This has limited the number of new vehicles that can be built, which greatly increases the cost of new cars and the value of used cars. That’s fine if you buy a car before the price goes up, but if you buy a car after, after Prices have gone up – and you took out a loan for it – which can put you in a bad position when car prices go down to normal. This would be a prime example of when it might be a good idea to get gap insurance.
Where can I get Gap insurance?
While the dealer you bought the car from or the financial institution you got the loan from would like to sell you gap insurance, another option is to get it through your insurance company if it’s offered. For one thing, you may already be dealing with it if your car is assembled. Also, you’ll likely renew your insurance every 6-12 months, so it’s easy to remind you to compare the value of your car to the amount you owe on it to determine if you still need gap insurance.
How do I determine the value of my car?
Since your insurance company may be the entity that determines how much you will get if your car is assembled, it may be helpful to ask about the source you use to determine the value of your car.
A financial institution that uses industry standards such as Kelley Blue Book and NADAguides.com to determine fair market value. Note that the barter value on any of these sites will be lower than the retail or private party values, so check which one is being used. Beware if Black Book is the source, however: It’s primarily for merchants, tends to quote lower numbers and isn’t available online for free. Once you know how the value of your car is determined, you can check it online yourself.
