What Is GAP Insurance? How Does It Work, and Is It Worth It?
What is GAP Insurance? How does it work? And, is it worth it? We are here to help you learn more about GAP Insurance so you can make an informed decision.
If you’ve recently purchased a new car, let us first say congratulations! For many, a new vehicle is a sign of good fortune, an indication that you’ve achieved a new level of success, or that you’re ready to level up in life.
There’s nothing like that new car smell. Do you know what else there’s nothing like? Getting into a car accident and realizing the value of your vehicle is less than the outstanding balance on your car loan.
We hate to go there, but not as much as we hate the idea of our members, or anyone, facing that surprise because they didn’t know about GAP insurance.
GAP stands for Guaranteed Asset Protection, and as the name implies, GAP insurance is a type of car insurance coverage designed to cover the difference between the actual cash value of your vehicle and the outstanding balance on your auto loan or lease. It’s not a replacement for standard car insurance. Still, it is intended to be used in conjunction with collision and comprehensive coverage insurance in the event of a total loss or theft.
It might seem unnecessary, but data shows that the share of Americans with negative equity in their cars has skyrocketed in recent years. In April 2020, car dealers reported that the trade-in value of 44% of new sales involved a trade-in with negative equity. And recent reports indicate that the number may be rising.
Unfortunately, you, or someone you know, may be sitting on an asset with negative equity without realizing the potential consequences. Luckily, GAP insurance can be an affordable solution to ensure that your fancy new car doesn’t become a financial drain if something goes wrong.
Here are some reasons why it might be worth it for you.
Protect your investment (This is the obvious one)
When you purchase a new car, it immediately loses value as soon as you drive it off the lot. If your vehicle is totaled or stolen, your insurance company will only pay for the current market value of your car, which may be less than what you owe on your loan. GAP insurance bridges that gap so you can rest easy knowing you have protected your financial security.
It’s a low cost.
GAP insurance is inexpensive compared to your car loan or lease cost. Many financial institutions, like Blue and car dealerships, offer gap insurance, which can be added to your loan or lease payment. Some insurance companies often provide the ability to add GAP insurance along with the rest of your plan.
It’s always wise to shop around for the best price and value that fits your needs. Most dealerships, financial institutions, and insurance companies offer great GAP products. However, some dealerships mark up the cost of GAP, as they must pay for overhead expenses, sales commissions, and other fees.
Peace of mind.
Knowing that you are protected in the event of a total loss can give you peace of mind. GAP insurance provides extra protection and ensures you are not left with a large debt.
Lease agreements require it.
Many lease agreements require gap insurance to be purchased. It is essential to read your lease agreement carefully to determine if GAP insurance is required.
Helpful for new car purchases.
GAP insurance can benefit car purchases, as the value of a new car depreciates quickly in the first few years of ownership. According to the Insurance Information Institute, a good rule of thumb is to strongly consider gap insurance if you put less than 20% down on your car or your loan is longer than 60 months.
Considering GAP insurance to account for potential worst-case scenarios is far from the most exciting part of purchasing a new car, but it is important. Taking the time to investigate your options and think through what you can afford now and what you might risk in the event of an accident or theft will help keep your financial footing strong. No matter what the future may hold.
If you are in the market for a new vehicle loan, looking to refinance, or need to add GAP insurance to your current loan with Blue, please visit one of our branch locations or call 1-800-368-9328.
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