What is GAP insurance?

Everyone is so excited when they drive that new car off the car lot.  There's nothing quite like that new car aroma.  Problem is, that new car depreciates as soon as you drive off the dealer's lot.  A vehicle is considered a "used" car once the title is transferred from the dealer to the buyer.

So, what if you finance 100% of the cost of a vehicle with no down payment for 60 months or more?  (Don't laugh, this happens all the time.)  In the first few years, your monthly payments are comprised mostly of interest, so the principal is not declining much (kind of like our homes).  If you have a wreck and total your car, the insurance pays your car loan off, right?  Not all the time!

Let's say you still owe $10,000 on your car, but the car's book value is now $8000.  If your car is totaled, the insurance company generally pays the book value ($8000) to the lien holder less your deductible.  Who pays the difference between what you owe and what your insurance company paid?  You do!  Unless you bought a Gap policy. 

A Gap policy pays the difference between what you owe and what the car is worth.  These policies can be purchased from the car dealer, or from an insurance agent (like me!), for a minimal cost.  They last for the length of the loan and may even pay your deductible if your car is totaled.

So keep this in mind when you buy your next car, or you know someone who might be looking to purchase.  A Gap policy may save you a lot of headaches!