Gap insurance is becoming increasingly popular for new cars, but what about used cars? A used or pre-owned vehicle is less valuable and is consequently less of an investment, but you might have laid out $10,000 or more. This is a sizable chunk of change, and you might want to consider gap insurance.
Purpose of Gap Insurance
GAP stands for “guaranteed auto protection” and can be added to any car insurance policy. The purpose of gap insurance is to prevent a situation in which you owe more than the car is worth in the event that it is stolen or totaled. According to Edmunds.com, this type of coverage is generally applied to new cars.
However, gap insurance can be beneficial in any situation where a vehicle is depreciating quickly enough that you might owe more on the car than it is worth. Otherwise, you could wind up paying thousands of dollars for a vehicle you no longer own or cannot drive.
Breaking Down the Math
The only way to determine whether to buy gap insurance for used cars is to run the numbers. It might not be the most entertaining activity on which to spend your time, but it could save you a big chunk of money down the road.
There are three things you need to know before you figure out if you need gap insurance for used cars: the actual cash value of the vehicle (ACV), the amount of the loan and the amount of your down payment.
Having low down payments, according to Edmunds, is one situation in which you might need gap insurance for a used car. For example, let’s say you purchase a pre-owned vehicle for $15,000 and put nothing down. If you total the car or it is stolen in a couple of months, the depreciation in that short amount of time could very easily leave you owing on the car. Edmunds recommends purchasing gap insurance for used cars if you put less than 20 percent down.
Of course, this doesn’t necessarily apply if you purchase a car for $4,000. In that case, gap insurance might increase the cost of your insurance to a degree that would cost you more money even if the car is totaled or stolen.
The number of months for which you finance a pre-owned vehicle can also play a part in your decision. Gap insurance is sometimes necessary for used cars when you spread the payments over a greater period of time, because you pay more interest and you pay down the balance slower.
Use your best judgment and remember that you can cancel gap insurance at any time. Once you reach a point where your used car is no longer worth less than what you owe on it, gap insurance becomes superfluous.
Understanding the Terms
Different insurance companies handle gap insurance in different ways. Don’t be pressured into purchasing it and don’t neglect to read the fine print. The details can make a world of difference.
It is usually best to talk to your insurance agent in person before buying gap insurance for used cars. You’ll have the opportunity to get answers to all your questions, and you won’t have to worry about signing a policy you don’t understand.
Make sure you ask whether gap insurance will cover the total discrepancy between what the car is worth and the amount you owe on your loan. Find out if it matters that you’ve purchased a pre-owned vehicle, and ask about any other riders on your insurance policy that might conflict or provide redundant coverage.
Edmunds, Gap Insurance