My first job was at a local credit union and I worked in a small satellite office. I was just a teller but I do remember my manager telling me about a girl who had applied for an auto loan and when she was driving off the lot with her brand new car she was hit by another vehicle and her new vehicle was totaled. She had put some money down toward her new vehicle, but it wasn’t a ton and she had no money to put toward another vehicle.
Now, if she had not had gap insurance she never would have been able to purchase another vehicle. The amount the insurance company gave her would have covered some of the loan, but not all of it, since she financed it. She had almost declined it but at the last minute decided to sign the form.
Most people don’t see the need for gap insurance. It usually adds to the loan amount making payments higher and they figure the odds of getting in an accident that totals their vehicle is slim to none. But I think some people don’t actually understand gap insurance and why they should look into it if they finance a vehicle.
Gap insurance is usually offered through the financial institution you go through to finance your loan. You can also check with your insurance company to see if they offer gap insurance for less than the bank or credit union you are going through. Prices for gap insurance vary from institution to institution and in most cases the insurance premiums are spread out over the life of the loan and go down as you pay down the balance.
Gap insurance is exactly what it sounds like. It stands in the gap between what you owe on your vehicle and what your vehicle is worth. You can find out what your vehicle is worth by checking Kelley Blue Book or NADA data bases. Vehicles tend to lose 10% of it’s value as soon as you drive them off the lot. And a new vehicle loses about 15-20% of it’s value in the first year of ownership. So if you put down 5-10% on a new car and you finance the rest and then get into a car accident, you will need to pay back the loan. And you may not have enough equity in that vehicle to put toward a new vehicle.
If you are purchasing a vehicle and putting down anything less than 20% of the value then gap insurance is something you need to consider.
Now, you’re probably wondering what to do if you decide to pay cash for a vehicle and the truth is you won’t need gap insurance. Gap insurance is only for those who are financing a vehicle. You won’t need to worry about paying back a loan because there isn’t a loan to pay off. So when you get your insurance check it can go right into purchasing a new vehicle.
Have you ever had gap insurance in the past? I’d love to hear your experience. Were you happy that you had it or did you wish you had passed on it?