Should You Get GAP Insurance?
For example, let's say you purchased a brand new car for $25,000. You total it after driving it for a year and the insurance company determines the car's replacement value is $18,000 - this is how much they will reimburse you.
The problem is that you still owe the lender $21,000 - a difference of $3,000.
This $3,000 is the "GAP" that you're on the hook for.
GAP insurance is only used when you finance or lease a vehicle. In most leases, it's required and sometimes provided for free.
When you buy a new car and take out a loan, if you don't put a down payment of at least 20%, you will be at risk if you total the car within the first 2 years.
GAP insurance is relatively inexpensive, so it's recommended that you get this - especially if you put no money down or have a loan term of 5 or more years.
The average GAP insurance claim is around $3,000 so it's not chump change we're talking about.
Where to Buy GAP Insurance
Most people buy GAP insurance through a car dealership or through the lender when completing the paperwork.
You will generally pay $500 to $600 for the coverage which lasts for the entire life of the loan - however, it's wise to drop the coverage after 2 years if you can get a partial refund.
A better place to buy GAP insurance is through your auto insurance company. The problem is that not many offer it, but the ones that do are at relatively low cost.
MetLife, for example, will pay the full cost to buy a new car if totaled within the first year and driven less than 15,000 miles.
Progressive offers a rider on their policies that will pay 25% more than the car's actual cash value if totaled. They charge around $50 per car per year.
Allstate is another insurance company that offers GAP insurance. You'll find that most companies charge between $25 to $75 per year for GAP coverage - well worth the price.
My Recommendation for Car ShoppersTrueCar No-Haggle, CarsDirect, and Ryde Shopper are the quickest way to see the lowest car prices in your area. These sites show you no-haggle prices from dealers closest to you - and the deals are usually really good. This should be the first step you take when negotiating your car price. Follow this up with my checklist to make sure you squeeze out every last bit of savings.
- Gregg Fidan
Each week, I'll keep you up-to-date on the latest car deals and news that might affect your purchase. This includes...
- Best Rebates, Incentives, and Lease Deals
- Latest Car Buying Scams and Tricks
- The Best & Worst Time to Buy a Car
- Which Cars You Should Avoid