GAP Insurance-what is it, do you need it?

Lately, I had many conversations about gap insurance.  I hope this blog is seen by car buyers, before they buy a car.

Cars depreciate in value.

Depreciation most often happens faster than you can pay off your loan/lease.

For the almost entire lifespan of your loan there is a GAP between vehicles actual value and the amount you owe on the vehicle.

This gap situation might look like this:  your car is worth $12,000, but you still owe $15,000.  If your car is totaled, insurance company will only pay actual value $12,000, minus applicable deductible.  So, you would only get a check for $11,500 (in this example I am using a $500 deductible).  You still have to pay off your loan.  You have $11,500, but you owe $15,000, you are short $3,500.

Without GAP insurance you would have to come up with $3,500.  If you have GAP insurance insurance company would have to send you a check for $15,000 minus applicable deductible.  

If you buy GAP insurance from a car dealer, it will cost you around $700-$900.  If you buy GAP insurance as an endorsement on your auto policy, it will cost you about $20-$30 a year.  You only need GAP coverage for the lifetime of the loan.

So, if you have a loan, having GAP insurance is a must, and having it on your auto insurance policy makes financial sense.