The first time most people hear the term “GAP insurance” is when an auto dealer is asking them if they want to purchase it for their car, along with several other options. If you’re one of those people, you probably remember looking at the description and trying to figure out just how important it is in relation to the other options the dealer is trying to sell you.
The truth is that GAP insurance can be very useful, especially for new cars, but it isn’t an option everyone needs.
As you probably know, a new car loses a substantial amount of value the moment a customer drives it off the lot, and its value continues to decline each year. This isn’t a problem for most people, but if you’re unlucky enough to get into a serious accident the first year you have a new car, you’ll find that your insurance company will only pay for the value of your car at the time of the accident, regardless of how much you paid for your car initially.
For example, if you paid $15,000 for a new car and it gets totaled eight months later, the insurance company will write you a check for the depreciated value of the car, say $10,000. You’re still responsible for paying back that $5,000 for a car you’ll never use again.
This is where GAP insurance comes in. Despite what you’re thinking, GAP insurance doesn’t get its name because it covers the gap between the original amount you paid and the value of your new car at the time of the accident. Instead, it stands for Guaranteed Asset Protection, which means that…well, it covers the gap between the original loan you took out and the value of your new car at the time of the accident, which can save you thousands of dollars.
Even though GAP insurance can potentially save you thousands of dollars, it’s not something that can help every car owner. Eventually, your car’s worth and the amount you owe on it will be more or less equal, and having GAP insurance won’t make sense.
GAP insurance is worth it if you:
To answer whether you need GAP insurance, consider your current situation. If you’re the original owner of a car that’s less than two years old, made a small down payment (or none at all), or if you have a long loan term, GAP insurance could be a smart investment for you. It's especially useful for those who lease or drive a lot, providing peace of mind in case of an accident.
Assess Your Car’s Value: Is it worth less than what you owe on your loan?
Consider Your Loan Terms: Is your loan longer than 48 months, or did you make a small down payment?
Evaluate Your Driving Habits: Do you drive a lot or lease your vehicle?
If you answered yes to any of these, you’re the kind of person who could benefit from GAP insurance. If you’d like more information about buying GAP insurance, become a member of First Alliance Credit Union today. We offer GAP insurance to members who take out an auto loan with us at a very affordable rate. First Alliance also offers extended warranties to give you additional coverage on your new car, as well as debt protection to help you pay off your loan in the event of job loss, death or disability.
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