GAP insurance is a debt cancellation policy. It covers the difference between the actual cash value of your vehicle and the amount owed on your loan or lease. Let’s analyze the “should I buy it” question.
The ideal candidate for purchasing GAP insurance is someone who falls into one or more of the following situations: (1) finances their vehicle for 60 months or longer; (2) puts less than 20% down; (3) rolls negative equity from a previous leased or financed vehicle; (4) drives 15,000 miles or more per year; (5) the vehicle purchased has a history of rapid depreciation; (6) the vehicle is leased and the leasing company does not include GAP protection.
When a vehicle is financed for a term 60 months or longer, the buyer has more exposed risk. The vehicle’s depreciation out-paces its equity due to the lower payments associated with the longer financed term. Loans with less than 20% down are susceptible to this same reasoning. With little or no money down, the buyer rolls into the loan sales tax and DMV fees which immediately makes the loan amount higher than the vehicle’s value. Depending which State you live in, sales tax alone can be close to 10%! This amount magnifies even more once depreciation is factored in when the vehicle is driven off the lot.If you had rolled in negative equity from a previous loan or lease, then the situation is worse.
Few people fully consider their driving patterns before buying a new vehicle. This is an important consideration because if the vehicle is driven 15,000 miles per year or more, and/or the vehicle is financed 60 months or longer, then the vehicle typically depreciates much more quickly than the loan is paid down. This is compounded even more when a vehicle with a history of high depreciation is purchased under these conditions. Vehicles with a history of being used as rental vehicles generally experience higher depreciation.
In summary, GAP insurance can be very beneficial and can potentially save you thousands. It is very important to understand the terms and to analyze whether it is right for you. My company provides one-on-one consultation to help you determine if it makes sense for your situation.