The Car Pro’s newspaper column can be read weekly in the Austin American-Statesman, Houston Chronicle, Sacramento Bee, San Antonio Express News, and various other newspapers around the country.
Generally when you buy a car, you get offered the opportunity to purchase certain insurance policies when it comes time to sign your final papers. They include credit life insurance, sometimes disability insurance, an extended warranty, and GAP insurance among other optional products.
Everyone buying a car has a different set of circumstances and which of those policies you purchase, if any, are certainly your choice. However, the one policy that for most should be a must-have is GAP insurance. GAP stands for Guaranteed Auto Protection and it protects you against being in a deficit position should your vehicle become a total loss, or if it is stolen and not recovered.
It is no secret that cars depreciate the day you drive them off the lot. After all, your new car is now a used vehicle and can no longer be sold as new. Depending on the vehicle, the immediate loss of value can be thousands of dollars. I hear from people all the time who think their collision insurance will automatically pay off a vehicle loan if it is destroyed. That could not be further from the truth.
In the event of total loss or an unrecovered theft, the insurance company is only obligated to pay replacement value for your car. So imagine the panic you would feel if the insurance company paid you $20,000 for your totaled car, but you still owed $25,000 on it. I have seen cases way worse than that. I have seen people pay for cars that were destroyed years after they were wrecked or stolen. GAP takes care of the difference between the two amounts; the value of the car and the amount owed. Remember, your lender doesn’t care that your car was totaled or stolen; they still want that monthly payment!
Are there any cases when you should not strongly consider GAP insurance? Yes, those paying cash for a car or those putting up a really large down payment do not have to worry about being “upside down” on their vehicle, but these cases are by far in the minority. Most people today put little or no money down and many actually roll negative balances from their old vehicle into the new loan. In those cases, GAP is a must.
Just to give you an idea of the cost, on a typical $20,000 loan for 60 months, the premium is $275 total over the length of contract. On a 6.9% loan, GAP insurance adds $5.43 per month to your payment. On lower interest rates, the effect on your payment is even less. If you want to add GAP at the time of purchase, all dealers offer the coverage. You can also check with your insurance agent, many of them offer the coverage. If you already have a loan and want to purchase GAP, you can check with your insurance agent.
For me, GAP insurance is the most affordable and necessary policy you should consider when buying a car. You cannot do anything about vehicle depreciation-whether it is a brand new car or a pre-owned one-but you can protect yourself against losing your vehicle and still owing a large balance after the fact.