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Is Gap Insurance Worth It?

By Mike Heuer

That is a question on the minds of a lot of people as they sit in a car dealership ready to sign financing papers when they are hit with the gap insurance sales tactic from a car salesman. Because most people are not prepared for the question, many of them often find themselves signing up for less than ideal insurance plans designed to protect against the potential deficit between what a car is worth and how much is owed on it if it is wrecked in an accident. But that does not need to be the case.

When seeking answers to the question: “Is gap insurance worth it?” most people are best advised to consider the situation in which they are financing the vehicle. In almost all cases when leasing, it is best to carry the coverage due to the typically high fees for running over on mileage. When trading in a leased vehicle after two years of use, if the owner has gone over by a great deal on mileage, there could be a hefty sum to be paid in order to balance the ledger. The same goes for if the vehicle is totaled in an accident, stolen or otherwise determined to be a complete loss. If a lot of miles had been wracked up, a large deficit likely would arise between the vehicle’s actual value and what an insurance company would pay out. That is where a general auto protection plan would come in handy.

Another instance in which it is easy to answer: “Is gap insurance worth it?” occurs when paying less than 20 percent of the selling price for a down payment or whenever there is a high interest rate or the vehicle is financed for more than five years. In such instances, the amount of interest charged almost always amounts to much more than the actual value of the vehicle being financed, sometimes by thousands of dollars. That means if it is wrecked, stolen or otherwise lost due to even a covered peril, the owner would be on the hook for what likely would be a $2,000 or more deficit owed to the bank or other lender that would not be covered by an auto insurance plan. Only a general auto protection plan bought for pennies on the dollar would fully cover such an instance.

Another case in which gap protection is advised occurs when buying high value vehicles with a traditionally high rate of depreciation, such as luxury automobiles, SUVs and some pickup trucks and other vehicles. Even with a reasonable interest rate charged on such vehicles, the sudden drop in value when they are used easily outpaces the rate at which the loan is paid off. If wrecked, the vehicle could leave its owner with yet another potentially large bill to be paid to the bank or other lender, which makes it difficult to easily transition from a lost vehicle to one in which the owner can continue going about his or her daily routines, including working.