Should You Get GAP Insurance?GAP insurance, sometimes referred to as a loan/lease payoff, protects you in the event that you total your car and the cost to replace it is less than what you owe on the loan.
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.
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