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Should You Buy a GAP Policy When Purchasing a Car?

written by: •edited by: Rebecca Scudder•updated: 5/18/2011

If you buy a new or used car and finance it, one of the options you have is to purchase a GAP insurance policy. What is GAP insurance, what does it protect you from, and how much does it cost?

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    Understanding the Policy

    Challenger 003 Many vehicle owners who finance their car, truck or SUV are upside down when it comes to the vehicle's value. What that means is that the depreciated value of your vehicle may be $10,000 but you owe more than $10,000 to the finance company, credit union or bank.

    Consider if you were in an accident and the insurance company totaled your vehicle and gave you a check for the depreciated value but that check wasn't enough to payoff your auto loan. Where do you come up with the difference to payoff your auto loan? This is where Guaranteed Auto Protection or GAP auto insurance comes in.

    Using our example, if your vehicle is totaled for any reason, and the value of the vehicle is $10,000 but you owe $15,000 on the auto loan, a GAP policy provides you cash dollars to cover the "gap" between what the vehicle is worth and what you still owe. Most GAP insurance policies will also pay your deductible in the case of a loss.

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    Where to Buy Policies

    When you visit a car dealership or used car lot and purchase and finance an automobile, chances are they will suggest you purchase this type of policy. GAP insurance call be rolled into your auto loan and due to its low cost, will only affect your monthly premium by a few dollars.

    Keep in mind that car dealerships and used car lots are out to make profits so chances are the GAP policy you will be offered will fall in the $500 to $800 range. Most dealerships and used car lots only have to pay $250 for that GAP policy so they pocket the rest as profit.

    You can purchase GAP Insurance online from companies like Driver's Select. This company offers GAP insurance policies for as low as $349 as long as your have financed your vehicle within the last twelve months. To save dollars on GAP auto insurance, when you do finance a vehicle through a dealership, used car lot, bank or credit union, decline the GAP policy offer and purchase a policy on your own. You should also check with your homeowner's insurance carrier as they may offer this type of insurance to their customers.

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    Why You Need It

    Statistically, the chance of your automobile being totaled is low, however, if it is damaged through an accident or some force of mother nature, this insurance will protect you from coming up with cash you don't have.

    According to USA Today, 40 percent of car owners are upside down and have negative equity in their vehicles. That number rises each year due to the six and seven term auto loans compared to the standard five-year auto loan. Because a GAP policy will cover the difference between what your vehicle is worth and what you owe on it, for the few extra dollars it costs you a month or even if you purchase your own policy, you can be assured you will be able to payoff your auto loan. Most GAP policies will pay up to 130 percent above the vehicle's depreciated value.

    This type of extra protection may not seem like something you need, but just as you would buy a car warranty or an appliance warranty, GAP insurance should be considered a valuable tool.

    Before you purchase a policy at a dealership or used car lot, compare prices from companies on the Internet and make sure to ask questions. Find out exactly what the company will pay if your vehicle is totaled. Also ask if the policy will cover you for any reason, even mother nature disasters, and if your deductible will be paid.

    Purchasing this protection should be judged as a necessity these days, especially as auto loans are longer in term to keep monthly payments at a minimum.

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    References

    Driver's Select - http://www.gap-insurance.com/

    USA Today - http://www.usatoday.com/money/autos/2003-07-06-car-loan_x.htm

    The author has co-owned Ford, Chrysler, Dodge and Jeep dealerships and is experienced in selling these policies.

    2009 Dodge Challenger photo courtesy of author.