What is gap insurance?
Gap insurance is one of the most sold "back end" items in the finance office at car dealerships. So what exactly is gap insurance?
When you buy a car, you also get insurance on that car (hopefully). When you buy insurance you are insuring that specific vehicle, not a set dollar amount. That's an important distinction. If your car is worth $15,000, you paid $14,000 but financed your taxes, fees and had negative equity you could easily be financing $19,000 or more. If your in an accident your insurance company will only pay the $15,000 your car is worth.
Some people have a hard time understanding why their insurance company won't pay all the insurance. An agent in Las Vegas put it in a very clear way for me once. If your car is worth $15,000, you put down $10,000 and are only financing $6,000 how much would you want back if your car was in an accident? What you owe or what the vehicle is worth? Obviously you want what its worth, and it works both ways.
Now that you understand this, where does gap come in? GAP or guaranteed asset protection, is an insurance policy that is made to cover that deficiency or "gap" in coverage.
So, do you need GAP? Yes and no. If you pay cash, have a large down payment, a free and clear trade worth a few thousand or more, you may not need it. If your credit isn't great and you have a high interest rate, your carrying negative equity over from a trade in, or your buying with no, or low, money down you probably do.
For the sake of this article lets assume you understand gap now, and have decided you need it. So, where can you buy GAP at? You can get gap insurance from your insurance company, online or from dealerships themselves. My advice is to go with someone other than your insurance company. The reason is that most aftermarket gap companies also cover your deductible while your insurance company will not. That leaves dealerships and online companies, both are very similar and usually from the same underwriting company so there is no large difference I'm aware of.
Now that you've found where to get it, how much should you pay? GAP insurance cost usually varies by the term of your loan, the longer the term the higher risk and cost. Most GAP policies are now state controlled since they are an insurance item and because of this their prices are controlled as well. In Las Vegas and all of Nevada, gap is set between $200-$500 dollars depending on the terms. Watch out for dealers that try and bundle gap with a much more expensive package implying that its the only way you can get it.
Now that you understand gap you should have a good idea if you need it or not, where to buy it and how much to pay