Friday, January 30, 2015

When Should You Buy Additional Insurance Protection From The Dealer?

If you've financed a vehicle recently, one of the pressing last minute decisions you're forced to make with the finance manager is should you buy or not buy GAP (Guaranteed Asset Protection) insurance. We'll give you our spiel so that you're not caught off guard. GAP is usually built into lease payments.

So, what is GAP insurance? GAP covers the difference between what you owe on your car loan and the current market (cash) value of the vehicle. The difference is known as GAP.  GAP insurance is typically purchased by the buyer when there is a loan payment and the borrower owes more than the value of the vehicle in case the vehicle is stolen or involved in a major accident and is no longer driveable.

For instance, if you're trading in a vehicle with a payoff and its being rolled into the loan of a new vehicle, its always highly recommended to purchase GAP insurance. The reason is that in case the newer vehicle that you purchase is involved in a major accident and it happens to be totaled-out by the insurance company, the insurer will only cover cost of the newer vehicle. The insurer will not cover the amount of the pay-off of the traded-in vehicle that was rolled into the loan.  Out of pocket, the buyer will be responsible for paying the remaining amount the insurer opts not to cover. This is why GAP is recommended to protect the buyer.

Another reason we recommend buying GAP is when the buyer opts to stretch out the loan on a new vehicle beyond 5 years and when you have a high interest rate. Many buyers these days are locking into 6, 7 or even 8 year car loans. The longer the loan is stretched out the greater the chance the value of the car decreases. It makes sense to invest in GAP insurance. 

We don't recommend buying GAP if you're buying the vehicle well below market (cash) value, you're buying a vehicle with a high resale value, you're not rolling in an unpaid trade-in vehicle into the financing and the vehicle is 5 years or less. It just makes no sense. 

Vehicles from Honda and Acura usually carry a high residual value, meaning they maintain a high resale value, when they are resold as used vehicle. This doesn't mean GAP isn't required. 

Our suggestion is to have the finance manager to work out the numbers to see if buying this product makes financial sense. You can also opt to speak with your insurance agent, purchasing GAP at a later time from your auto insurance carrier. Usually the cost is much cheaper than the dealer.

How gap coverage works

  • Loan balance on a 2012 vehicle: $20,000
  • Actual cash value (market value): $18,000
  • Payoff without gap coverage: $18,000 (minus your insurance deductible)
  • Amount still owed: $2,000
  • Payoff with gap coverage: $20,000
  • Amount still owed: $0

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