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The Value Of Gap Coverage

New cars cost a lot of money these days.  There are enticing no money down offers everywhere.  People are willing to pay $500 a month for a car, especially if they don’t have use too much of a down payment, or they are offered a low finance rate.   The big problem here is once you turn out of the dealer’s lot, the value of your “new” car has already dropped, 15 to 20%, some brands worse than others.

According to Cars.com, a 2011 Chevrolet Impala LTZ costs approximately $30,035 brand new at retail pricing.  After only one year, and driving only 12,000 miles per year, the suggested used retail price drops dramatically to $19,603, over a 35% drop in value, and 12,000 miles per year is below average mileage.   If your 2011 Chevrolet Impala LTZ is in an accident and deemed a total loss, or stolen and never recovered, you may owe more on your car loan than what the car is worth, due to its low re-sale value.  This is where Guaranteed Asset Protection, or GAP coverage, can be beneficial.

Gap coverage will pay the difference between actual cash value of the vehicle and what remains on the automobile loan or lease.  In a situation like this, say owning the Impala, you may have only put $2,000 down on a $30,000 car.  After a year, even at a low interest rate, you may have only paid down approximately $5,000 of the original $28,000 car loan, excluding taxes and fees.  This leaves the “gap”.  You may now owe up to $4,000, so no car and you still owe money.   Here the GAP coverage seems like a sound investment.  The question is how much extra is the coverage?

The coverage is typically not that expensive.   It is where it is purchased that makes the difference.  If the dealer is selling GAP coverage they are a middle man, and want to tack on some more money to their sale.  GAP can be shopped around just like any other type of insurance, banks and credit unions can offer this coverage, and of course your insurance agent.  A quick investigation into an online credit union offered a flat $350 quotation for GAP, of course this is subject to verification and different criteria, but it shows that it is a relatively inexpensive form of protection that covers the life of the loan.  Coverage can also be purchased on a used vehicle; certain restrictions apply, but may not be as necessary since much of the value of the vehicle depreciates in the first few years.   You can even buy GAP coverage after the fact.  It’s not too late if you have never heard of GAP when you bought your car and still owe a lot on your loan, if this coverage appeals to you look into endorsing the coverage.    Ask your agent, or check your policy, with the competitiveness of personal automobile insurance these days many carriers are including GAP free in automobile policies.

Finally, depending upon your lease or loan you may be required to purchase GAP coverage.  If you are not required to purchase GAP, then consider some of the factors involved that make GAP beneficial.  Are you putting little money down or taking out a longer loan?  Does the vehicle you are purchasing historically not hold its value well?  Do you drive more miles than the average driver?  This hurts in the value of the vehicle.  It can be a relatively small amount of insurance for peace of mind, but shop around for the best deal; it’s definitely a buyer’s market.