What You Should Know About GAP Coverage for Car Loans and Leasing Agreements

Ron Trumbo Insurance Editor

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Is it true what they say about buying a new car: "Once you leave the dealership, your new car already loses half its value?"

Well, kind of. Indeed, your new car will experience an instant depreciation that will take years of payments to catch up to, but it won't be half the value instantly. Generally, if you don't put a down payment on the car, you can expect to be upside-down in your car loan for the first couple years, depending on your new car of course, and how it holds its resell value. So, what happens if your new car is completely totaled in a accident beyond salvageable repair, or if it is stolen and never to be found? A standard car insurance policy may cover the replacement value, which may substantially different than what you really owe. This is where GAP coverage comes in.

Demonstration of GAP Coverage 1. You’re in involved in an accident in your 2011 model vehicle, and your loan balance is $25,000. 2. Your car insurance company recognizes the actual cash value of your vehicle (on the day it’s totaled) to be $21,000. 3. You’re faced with a $4,000 “gap” and still owe on your car loan, without a car! 4. GAP insurance protects that difference.

If you've ever had the discomfort of purchasing a new car, you'll notice that once you agree to the payments with the salesperson (after they went back-and-forth with their "manager") you'll be passed to the Finance guy at the dealership who will try to up-sell you on a slough of additional products, include GAP coverage, alarm systems, and whatnot. Don't get overwhelmed: here's what you should know about GAP insurance. Also known as Loan-Lease Payoff coverage, GAP insurance was introduced about 30 years ago to protect consumers from the steep decline in auto value upon driving off the dealership lot.

Skyrocketing car prices, unnecessarily long car loans, in addition to the new trend of vehicle leasing fosters a fantastic environment for GAP protection to flourish. GAP coverages provides protection for consumers when literally a "gap" exists between the actual value of their car and the amount of money owed to the loan or leasing company.

As a very simple rule-of-thumb, GAP insurance may serve your needs if you don't contribute a down payment of at least 20% when buying a new car, if decide to lease a car, if your car loan is longer than four years, or if you've taken debt from your previous auto loan and rolled it into your new loan. Interestingly, many GAP insurance policies will contribute to the deductible on the drivers primary insurance policy.

GAP insurance is not a total rip-off, as there is a need for it in many financial circumstances, but don't be oversold on the these policies. Especially those offered by new car dealerships offered in a high-pressure sales situation, packaging GAP insurance as a "low cost add-on" that can be tucked into the car loan. A common tactic is to say, "your loan is already $400; this extra few dollars is worth it." Chances are, those extra few dollars add up over the course of a year, and you can possibly find better savings elsewhere. Be aware that a few states such as New York require lenders of leased cars to include GAP insurance within the cost of the lease. This means that the monthly price stated by the dealer must include GAP insurance.

More information online about GAP insurance: GAP insurance