Gap insurance is a waste of money if you are not financing your vehicle or if you could pay the difference between your loan or lease balance and the actual cash value of your car out of pocket. Gap insurance is never mandated by state law, and it is only sometimes required by lenders or lessors. Thus, it is up to you to decide whether gap insurance is worth the cost in your situation.
Gap Insurance Might Be a Waste of Money When:
You buy a used car. Used cars retain more of their value after purchase than new cars, so the gap between the loan or lease and the actual cash value of the car will be small. Therefore, you might be wasting money if you buy gap insurance on a used car.
You make a large down payment. If you purchase a car for $35,000, for example, it’s actual value could fall to $29,000 in a year, leaving a gap of $6,000. But if you make a down payment of $6,000 or more and your loan balance remains below the depreciating value of your car, then gap insurance is unnecessary.
You can cover the gap yourself. The difference between your car’s actual value and the balance on your loan or lease may be small enough that you could pay it out of pocket. If it’s not too much of a burden, this is the better option, as you will not have to pay for gap insurance.
The cost of the policy is close or equal to the gap itself. If you would be paying the same amount for gap insurance as the gap in coverage itself, it makes more sense to skip the coverage and pay out of pocket if your car is totaled.
Ultimately, whether gap insurance is a waste of money depends on your individual situation. In many cases, gap insurance may be an unnecessary expense.
However, if you find that gap insurance isn’t a waste of money, WalletHub can help you find a policy that fits your needs.
Gap insurance is definitely worth the money if you owe more on your car loan or lease than the car is worth. For example, if you paid a small down payment on your car, your loan term is 4-5 years or your car will depreciate quickly, you should consider getting gap insurance. Gap insurance is never mandated by state law, and few lenders or lessors require it, so the decision to buy it depends on personal circumstances.… read full answer
Gap Insurance Is Worth It When:
You don’t have the savings to pay off your loan or lease if the car is totaled or stolen.
Your down payment is less than 20% of the car’s value.
Your loan will last four years or more.
You drive more miles than average, which reduces the car’s value faster.
Your car is a make and model that depreciates especially fast, like a luxury sedan or electric vehicle.
You are a single-car household and need a car to get around.
Your loan includes negative equity from your last car.
Since gap insurance covers the difference between the car’s actual cash value and the amount you owe, researching these two numbers will be a key deciding factor in whether gap insurance is worth it.
Why Getting Gap Insurance Is Worth It
For example, say you buy a car for $20,000 and your down payment is $2,000. This small down payment suggests that gap insurance might be worth it, but it’s still a good idea to check the car’s anticipated value after a year to determine if there will be a gap. If the car is worth $12,000 after a year but you’ll still owe $15,000, gap insurance could be a smart investment. If you don’t buy gap insurance and this car is totaled after a year, you’ll still owe $3,000 even though you can no longer drive it.
On the other hand, if your down payment is large enough or the car’s resale value is high enough that you’ll never owe more than the car is worth, gap insurance is unnecessary. Similarly, if you do owe more than the car is worth but you have the resources to pay the difference if the worst happens, it might be worth taking the risk.
Yes, you need gap insurance if you have full coverage and still owe money on a car loan or lease. Gap insurance is needed even if you have full coverage because full coverage does not cover the difference between what you owe on a loan/lease and the car’s actual cash value, like gap insurance does.… read full answer
When You Need Gap Insurance If You Have Full Coverage
You’re financing/leasing a new vehicle for a long term (60+months).
You made a small down payment on a new vehicle (less than 20%).
You rolled over negative equity from a previous auto loan.
You financed a vehicle that has a high depreciation rate.
Your contract has a high interest rate.
Your lender or lessor requires gap insurance.
The Difference Between Gap Insurance and Full Coverage
Gap insurance – short for guaranteed asset protection insurance, and sometimes called loan/lease payoff coverage – protects you financially from having to cover the cost of depreciation, or the difference between what you still owe on your contract and what your insurance company says the vehicle is actually worth today. Collision and comprehensive protection – the main components of full coverage, along with liability insurance – won’t cover that. As a result, you need gap insurance even if you have full coverage, especially if your situation leads to a relatively large gap to cover.
It’s important to remember that while gap insurance isn’t required by any insurer or state, having gap insurance on top of full collision and comprehensive coverage will probably be required by your lender if you’re financing/leasing a new vehicle, and even some used vehicles. In addition, gap insurance is meant specifically for drivers who still owe a balance on their vehicle, so if you own your car outright and have full coverage, you don’t have a need for gap insurance.
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