Gap insurance is worth it if you paid a small down payment on your car, your loan term is 4-5 years, or your car will depreciate quickly. 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.
When Gap Insurance Is Worth It
- 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.
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.
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