What is GAP Insurance, anyway?
Wednesday, March 14, 2018
When you make a big purchase the hope is always that it will become more valuable the longer you own it. That's true for certain things, like houses, but when it comes to buying a car, nothing could be further from the truth. Cars are notorious for depreciating in value quickly, which can put you at risk of owing more on your auto loan than your car is worth.
What is depreciation?
The second you buy your car and drive it off the lot it goes from being a new car to a used car. That's part of the reason why you see the biggest depreciation of value in the first year that you own a car, as much as 20 percent, and that number can be a lot higher for different makes and models of cars. For each year you own the car, it will depreciate an average of 15 percent-20 percent per year. So, if you finance a $20,000 car and you get in an accident where the car is totaled in the second year, your car could only be worth $12,800 depending on the make and model.
What is GAP insurance?
Let's say you have a 6-year loan with 3.74 percent interest. After two years, you'll still owe $13,824.58 on your loan. If you get in an accident and your car is totaled, the insurance company will only be able to pay you what your car is worth and after a year of use, that number is $12,800. Even though your car is unusable, you still have to finish paying off your loan, but now you owe more than the car is worth.
That's where Guaranteed Asset Protection (GAP) insurance comes in. If you got into the same accident and you had GAP insurance, you'd be covered for the difference between what you owe and what your car is worth, so you wouldn't end up paying anything out of pocket to cover your auto loan. Since GAP insurance is only designed to cover the difference between what you owe and what your car is worth, it only makes sense for people who are financing or leasing their cars, not for people who have paid off their loan or who have comprehensive and collision coverage.
How do I get it?
You can get GAP insurance through your credit union when you get an auto loan or you can get it as an add-on through your insurance company.
Ready to buy a car this spring? Be sure to take advantage of our spring auto loan promotion.