Gap Insurance – Do I Need it When Purchasing a New Vehicle?

Gap Insurance – Do I Need it When Purchasing a New Vehicle?

Do I Need Gap Insurance When Purchasing a New Vehicle?

If you are in a car wreck and your vehicle is totaled out, the insurance company is only required to pay you the fair market value of your vehicle, NOT the value of your loan.  In some cases, the value of your loan may exceed the fair market value of your vehicle (aka you are upside down on your loan).  Gap insurance is optional coverage you purchase at the time you buy a vehicle to cover the difference between your loan and the value of the vehicle.  Gap insurance meant to protect you from having to pay the remainder of your loan that the insurance company is not liable for covering.

Is gap insurance worth purchasing?

In my opinion, generally no.  It typically costs several thousand dollars and only protects you in the event very specific things happen to you: (1) Your vehicle gets totaled out, and (2) the value of your vehicle is less than the loan amount.  Most of the time, your vehicle is going to be repairable, so #1 is not as likely.  Also, at some point, between your down payment and the payments you make, the difference between the loan and the value of your vehicle should stabilize to the point where your vehicle is worth more than your outstanding loan balance.

However, let’s say you happen to find yourself in this unlucky situation.  In my experience, the amount a person is upside down generally does not exceed the several thousand dollars it costs for gap insurance, so it is probably better to risk this situation not arising and, if it does, just pay out of pocket.  I typically recommend a client tries to buy another vehicle from the place they purchased the first vehicle to see if they will roll the old loan into a new loan.  Usually, since the dealership wants to make another sale, they will work with you on the financing.  The insurance company will provide a sales tax waiver for the amount of the total loss so you are not stuck paying the full sales tax again.   For the vast majority of people who purchase gap insurance, they will not get any value.

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