Best Auto Insurance!

Should I include GAP on my auto loan?

by Anita Johnston on 12/04/2010 04:11 PM

In order to make an educated decision as to whether you should include GAP insurance on your auto loan, you must understand how it can help you in the case of an accident.

GAP insurance is the insurance that pays the difference between the actual cash value of the car and the outstanding balance left on the car loan in the case of theft or an accident. This insurance actually protects the loan on the car. Some policies will even pay the deductible.

When a car is totaled from an accident, fire, flood, tornado, hurricane, vandalism, or theft, the insurance company will pay the actual cash value of the car. During the beginning of the car loan, the actual cash value is quite a bit less than the retail value meaning you will not receive enough money from your insurance company to pay off the car loan. GAP insurance will pay the difference.

An example of GAP insurance. When a car is purchased at $37,000 with a down payment of $1,000 and 0% interest, you will still owe $36,000 making the monthly payments $600 per month. With your full coverage insurance, we will say the deductible is $500. You are involved in an accident during the time when you owe more than the car is worth, which occurs during the first three to four years of buying a new car. During the accident, the car totaled and the insurance company states the actual cash value of the car $34,000. For those that have GAP insurance, the insurance will cover $2,000, which is what is left on the loan plus the deductible. Remember, you will need to read your GAP policy to ensure that the deductible is covered in the policy.

A new car once it drives off the lot in only three months will be worth 30% less than the day they bought the car. In most cases, everyone that purchases a new car believed the insurance will pay them what they paid for the car or will cover the remainder of the loan. The sad news is that insurance companies will only pay the actual cash value if the vehicle is stolen or totaled. Some insurance companies do offer GAP insurance, whereas most dealerships offer this type of insurance as an optional coverage. The cost of GAP insurance can be quite expensive, however, the cost of not having this insurance can be devastating when you are trying to replace the lost car and pay the difference on the car loan the insurance company did not cover.