When buying your next car the salesman may suggest gap insurance. Your immediate thought may be that he’s trying to scam you into buying something you don’t need, but that isn’t the case. Gap insurance can actually be very beneficial to many buyers. If you think that your auto insurance is enough to cover any problems, think again. Let’s take a closer look at whether or not you should purchase gap insurance from your car dealer.
What Is Gap Insurance?
Gap insurance is issued to cover the gap that often occurs when a car is stolen or totaled. Those that are making payments on a car loan may find that their insurance doesn’t cover what they own on the loan. This is what’s referred to as being upside down in the loan – when you owe more than the car is worth. Because the insurance will only cover what the car is worth, you may find yourself owing thousands on a car you no longer have. Thankfully, with gap insurance, you can cover that gap.
How It Works
Let’s say you purchase a vehicle for $15,000. Your down payment on the vehicle is $1,000 and your trade in is another $2,000. That means you owe $12,000 on the vehicle. You make monthly payments of $250. Three months into owning the car, the car is totaled. The insurance company determines that the car is worth $8,000, which means that after the payments have been taken out, you still owe $3,250. Without gap insurance, that money will have to come from you. Your insurance is only going to cover what the car was worth. This can be devastating for those that purchase luxury vehicles, but it can also be devastating to those that are on a tight budget.
Who Needs It?
You may be thinking that you don’t need gap insurance because you don’t have a luxury vehicle or that you’re a really safe driver. However, many people with car loans find themselves upside down in the loan and coming up with even a $1,000 when you’re on a tight budget can be difficult. This is why it is recommended that anyone purchasing a car that requires a loan gets gap insurance.
Many cars depreciate a large percentage after driving them off the lot. If you’re buying a new car, do you really want to take the chance that your insurance won’t cover the entire cost of your loan should you get in an accident? Spend the money to protect your finances and give yourself peace of mind. Otherwise, you could end up owing on a car you no longer have.
About the Author: Deedra Lanum works for a car dealership and often sees people turn down add-ons they should seriously consider. Make sure you purchase gap insurance and a good roadside assistance plan. Both are invaluable!