How To Determine If Gap Insurance Is Necessary

Gap insurance is offered when you buy a new car. It is usually offered to you as an add-on to the price of the car. One way to determine whether or not you need gap insurance is to look at the resale value of the car you are buying. If the resale value is low, you should consider gap insurance.

What Gap Insurance Does

When you purchase a new car, you lose equity the minute you drive it off the lot. Although the value of the car drops significantly, the amount of money that you owe for it did not. This is what is called being upside down on the loan. You owe more than the value of the car.

If you were to have a wreck at this time, the insurance company would only pay you for what the value of the car is. If they say your car is only worth $10,000 that is what you will get. If you still owe $15,000 on the car, you will now owe $5000 for a car you cannot drive anymore.

Gap insurance is designed to fill in that gap for you. If you had gap insurance in this situation, the insurance company would give you a check for $5000 to cover the difference. 

Look at Resale Values

Some cars have great resale values and do not lose much value, if they are in good condition. Jeep and Mazda are two examples of brands that usually have good resale values. If you were to buy something that has a high resale value, it may not be as important to get gap coverage.

Review the possible sales price and subtract the amount you paid. If the difference is not worth the extra payment, then do not worry about it. If your car typically loses value quickly, it is well worth the extra few dollars for the gap insurance cost. 

Used Vehicles

Used vehicles are sold at market rates and do not usually depreciate as quickly as new vehicles. Therefore, you are in better shape when financing a used car. If you get into a really expensive used car, this could change. When a used model is just as expensive as some newer models, then it might be to your advantage to go ahead and get gap insurance.

Gap Insurance Providers

There are a number of places that you can get gap insurance from. Most of the time, when you buy a new car, the company will offer the insurance at the time of the sale. The cost is usually quite small in comparison to the benefit that you receive. You can pay it as part of your monthly payment or you can pay it all at once. If you pay it all at once, you may get a gap insurance refund when you sell your car.

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