Is GAP Coverage a good idea?
Tuesday, June 10th, 2008You have spent hours at the dealership, have finally agreed on monthly payments for the vehicle you have chosen, you enter the finance office to sign papers, and then you finance officer asks you, “would you like to purchase GAP coverage on this car?” “Say what? You want me to purchase something else?” “What is that?” you ask.
What is GAP?: Gap coverage pays the difference between what your car is worth and what you owe on the car.
Is it advisable to purchase GAP coverage, or is it just another way for dealerships to make money? Over 5 million vehicles are totaled each year and over 1 million vehicles are reported lost or stolen each year. So odds are eventually you or someone you know will become part of these statistics.
How does it work?: Say you purchase a vehicle for $20,000. Six months into driving your vehicle, it is involved in an accident and is totaled. After your insurance company examines your vehicle, they determine it was only worth $15,000 immediately prior to the accident. Your insurance is only going to pay out what your vehicle is worth. After six months of making payments, you still owe about $19,000 (remember your monthly payment includes interest). It is going to be up to you to cover the remaining $4,000 owed to the finance company. Most people don’t have that type of cash available, which is where Gap coverage comes in. Gap will pay the remaining balance for you.
Who should buy GAP coverage?: Anyone who expects to owe more on their vehicle than what it is worth.
Who should not buy GAP coverage?: Anyone who expects to have equity in their vehicle or anyone whose regular car insurance company states they will pay what you owe as opposed to what your vehicle is worth.
Bottom line: You don’t want to get caught in a position to owe any money out of pocket at the time of a total loss or theft. Dick Says Yes definitely advises you to purchase GAP Coverage when financing a vehicle that you may owe more on than it is worth at any given time.