Car dealers are doing almost everything they can to get you into their showrooms. With interest rates at an all-time low and virtually no deposit required, it may be very tempting to take advantage of these deals. If you decide to buy a new car, be sure you pay attention to more than just the sticker price as there can be last-minute additions that take place off the show room floor and in the business office that you may overlook.
One such addition is loan/lease pay off coverage or Gap coverage (Guaranteed Auto Protection). This is a type of insurance covering the difference between the actual cash value of a vehicle and the balance still owed on the financing (whether it be a loan or a lease) in case the vehicle is deemed a total loss by your car insurance company.
For example, if the actual cash value of your car is $18,000, but you still owe $23,000 to the financing company, you would still be on the hook for $5,000. Car insurance companies do not consider what you owe on your car when settling a claim. This is regardless of whether you are at fault or not in an accident.
As everyone knows, a car depreciates the second it drives off the lot, so if you have purchased a car with little to no money down or have a loan with a 36 month or longer term, GAP coverage can really save you from an upside down loan.
Now that you know the value of this coverage, be sure you consider where to buy it. Both financing and insurance companies typically offer this coverage but the price can vary significantly.
According to Edmunds.com, car dealers traditionally sell GAP insurance in the finance office as part of the sales contract. The dealership will typically charge $600 for GAP insurance, but this cost can grow to $800 over time once interest charges accumulate.
Insurance companies typically charge a percentage of the collision and comprehensive premium to determine the GAP premium. Though every carrier can charge what it believes is appropriate (as long as approved by the insurance commissioner's office), the standard rate is typically around 7% of your collision/other-than-collision premium.
This means that if you just bought a 2013 Jeep Wrangler and your collision premium is $312 and the other-than-collision coverage is $104, your gap premium would be about $28 a year. If you have a five year loan, you would pay a total of $140. That is quite a difference from $800 offered at the dealership.
That said if you have a young driver or high-end vehicle your collision premium would be much higher, so you need to think about this BEFORE you get to the dealership to decide what is best for you.
Each GAP contract is different but there are important considerations to pay attention to regardless of where you buy.
As mentioned, this coverage will vary depending on where you buy it. For the most informed decision possible, call a risk assessment manager at Holt Proctor McBriarty Insurance Agency, or your own insurance professional. Buying a car can be overwhelming even for the most confident of buyers. Coming armed with knowledge will help you make confident decisions that will benefit you and your wallet in the long run. Enjoy the car!
- You need to be in compliance with all terms of your loan/lease and auto policy.
- You need to maintain collision and comprehensive coverage on your car insurance policy.
- Some leases automatically include GAP/Loan/Lease coverage. Confirm this before you add it to your own car insurance policy so you don't have double coverage.
- Most insurance companies limit the availability of buying Gap/Loan/Lease coverage to the first 30 days of ownership of the vehicle
- Some contracts will not extend to the full gap amount if it is more than 25% of your vehicle's actual cash value.