For many people that purchase new or used cars at a car dealership, gap insurance might be a valuable policy type to consider at the time of purchase. A GAP, or Guaranteed Asset Protection, car insurance policy covers the difference in the amount an insurance company will pay for a totaled vehicle and the amount of money that a consumer still owes on his/her car loan.
Before purchasing gap insurance, it is important to know how gap insurance actually works. One of the most common examples given in support of gap insurance is the following: A customer walks into a new car dealership to purchase a vehicle at close to full sticker price, makes little or no down payment and finances the rest of the cost for the vehicle.
The customer then proceeds to get into a car accident just a few minutes after leaving the car dealership. While for all practical purposes the vehicle is still brand-new, the insurance company agrees to only pay about 85% of the cost of the vehicle because of depreciation. So, the customer is left responsible for the amount of the difference in the amount the car insurance company paid and the amount owed on the car loan. Had the customer had gap insurance, the gap insurance coverage would’ve paid the difference for the customer and the customer would’ve only been out his/her modest down payment.
If you are purchasing a vehicle and making a substantial down payment (somewhere in the neighborhood of 20% to 30%), then you probably won’t need gap insurance coverage. However, if you are purchasing a vehicle and making little or no down payment, gap insurance coverage should definitely be something you consider as most new and used vehicles will depreciate by as much as 20% to 30% as soon as you drive them off the lot.