What is Gap Insurance?
Gap insurance, or Guaranteed Asset Protection insurance, is designed to protect car owners from financial loss if their vehicle is totaled or stolen and they owe more on the loan than the car is worth. This situation often arises due to rapid depreciation of new vehicles.
How Does Gap Insurance Work?
For example, if you owe $25,000 on your car loan, but the car is only worth $20,000 at the time of a total loss, gap insurance would cover the $5,000 difference.
Dealer Gap Insurance
Pros
- Convenient one-time purchase
- Can be rolled into your car loan
- Immediate coverage
- May offer additional benefits like deductible coverage
Cons
- Generally more expensive (often 200-300% higher)
- Cannot be cancelled for a full refund
- Pressure sales tactics
- Limited flexibility in coverage options
Insurance Company Gap Insurance
Pros
- Cost-Effectiveness: Insurance companies often offer more competitive rates, typically $20-40 per year
- Customization: More flexible terms and coverage options
- Bundling Discounts: Potential discounts when bundled with existing auto coverage
- Can be cancelled at any time
- Better customer service experience
Cons
- Separate bill to manage
- May have stricter qualification requirements
- Could have coverage gaps if not properly coordinated
- Depending on the insurer, there might be a waiting period before coverage kicks in
Cost Comparison
| Provider Type | Average Cost | Payment Structure |
|---|---|---|
| Dealer | $500-900 | One-time payment |
| Insurance Company | $20-40 | Annual premium |
Important Considerations
When deciding between dealer and insurance company gap insurance, consider:
- Cost: Compare the total cost over the life of the loan
- Coverage Terms: Review the terms and conditions to ensure they meet your needs
- Financial Situation: Consider whether you prefer to finance the insurance or pay separately
- Existing Insurance: Check if your current insurer offers gap insurance and potential discounts
- Vehicle Depreciation: Research your vehicle's depreciation rate on sites like Kelley Blue Book
"Dealers often mark up gap insurance by 200-300% compared to what you'd pay through an insurance company." - Consumer Reports
When to Skip Gap Insurance
You might not need gap insurance if:
- You made a down payment of 20% or more
- Your loan term is 36 months or less
- You're buying a vehicle that holds its value well
- You have significant savings to cover potential gaps
For more information on gap insurance, visit resources like:
Most financial advisors recommend purchasing gap insurance through your auto insurance provider rather than the dealership, as consumers can save hundreds of dollars while maintaining adequate protection against financial loss.