When you purchase a vehicle from a car dealership, the sales pitch often includes gap insurance. The reason is that your car loses value the moment you drive it off the lot. In fact, the minute you sign the paperwork, your vehicle goes from being a new car to being a used automobile, and its value immediately decreases.
If you were to have a wreck in that brand-new car, your insurance company probably wouldn’t cover the cost of what you owe on it. They would only cover the cost of replacing your vehicle with one of the same value. This is why you should consider buying gap insurance when you purchase a new car. So what is gap insurance? Also known as guaranteed auto protection insurance, it will cover the difference between your car’s depreciated value and what you actually owe on your auto loan if your car is stolen or totaled.
If your car is demolished or stolen, gap insurance covers the difference between what your auto is worth (based on current market value) and the amount you still owe on your loan.
How to know if you will benefit from GAP insurance
Gap insurance is a wise choice in any of these circumstances:
- You are purchasing or leasing a new or slightly used vehicle.
- You are buying a vehicle of significant value.
- You are financing a new or used vehicle without a large down payment, creating a “gap” between your vehicle’s actual value and your loan amount.
- You do not have significant cash savings that would allow you to cover the difference between the amount you owe on your loan and the actual cash value if your car is stolen or totaled.