Used Car Gap Insurance: A Complete CheckList On How It works

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Since it is important, and a must (in some states) that every car (whether used or new) should be insured before the driver takes it to the roads, one has to carefully pick the right used car insurance policy for his/her ride.

A used car gap insurance comes into mind, but what about full coverage? Would it be best to opt-in for gap insurance or full coverage insurance? This is one of the biggest questions most car owners ask themselves.

Plus, being that the car is not brand new, one may also ask if it is important to accept the gap insurance offer from a dealership.

A lot of things are to be considered when buying a used car – here, in this blog, you will understand the gap insurance policy, as well as learn its benefits and cons.

Not everyone needs this policy, most especially if you are not buying the “used car” at the mercy of a car financing deal from a dealership.

What Is Used Car Gap Insurance?

GAP Insurance, which connotes “Guaranteed Auto Protection Insurance,” is a typical insurance policy that is basically meant for buyers who are paying for a used car via a long-term car financing deal or lease.

Some people see this as an optional car insurance policy, and dealerships usually sell this insurance coverage to buyers that do not commit a down-payment or when the buyer is only eligible for high-interest loans.

There are other reasons why a car dealer may sell you this insurance coverage, but it is usually not included for cash buyers.

Also, it is important to say that GAP insurance doesn’t cover the primary auto insurance required by some authorities in some states.

Just as mentioned earlier, it is optional insurance coverage if the buyer is on a lease agreement or paying through a financing deal.

The primary purpose of gap insurance is to pay off the difference between the depreciated car value and the remaining amount owed by the buyer at the time of a critical event such as an accident or theft.

Nevertheless, a gap insurance policy can be very expensive, most especially when you buy from a dealership.

You should also consider some things before agreeing to a gap insurance coverage; you may not need it, but you think you do. Below is how the policy works and when you need to apply.

How Does Gap Insurance Work

Most cars (both new and used) lose up to 20% of their value after the first year (from the day it was purchased). You should first know what a used car before buying it.

GAP Insurance
GAP Insurance
Photo credit: toyotaofseattle

The basic math has always been to mitigate the scenario of paying very high, more than the current value of a particular car.

Auto insurance policies are a way of covering the depreciated value of a vehicle at the time of a claim.

Normally, your primary auto insurance would cover for collision when you wreck the car in an accident, but the policy won’t cover for the remaining debt you own for the car; this is where GAP insurance comes to play – standing in the “gap” between the remaining debt and the current value of the car in the market.

Now, let’s get practical here, for instance, you got a new (used) car for $20k under a dealership car financing deal.

However, unfortunately, the car was totaled in an accident, and this happened within the first 3 years of buying the car.

Because cars are liable to lose up to 30% of their value/worth within the first four years (from when you purchased them), the car’s current value may be $11k at the time of the accident.

But, maybe you still owe over $11k for the car, let’s say, your car loan debt is remaining about $15k.

Now, if you have GAP insurance coverage, the GAP insurer will come in and save you $4k; hence, you’ll only have to pay $11k, which is the current market value of the car as at when it got stolen or wrecked.

Note: if you’ve got collision coverage, the insurer will pay the $11k remaining loan price to the dealership or lender.

Nevertheless, the reimbursement from a car insurance company goes to the account of the lender you’re owing, and it must be confirmed that the car (in question) can no longer be used (it is totaled).

You will not get a new car replacement from the GAP insurer or your primary auto insurance company.

But, if you sign up for new car replacement coverage, you may get a new ride (based on strict T&C’s) if the old one zeros out.

How to Get GAP Insurance Coverage?

Most dealerships offer GAP insurance, but studies have shown that it is cheaper when you don’t buy from dealerships. Alternatively, it is advisable to buy used car GAP insurance online.

When you go for this method, it allows you all the time to research and discover the entailments of the gap policy you’re about to sign up for.

With dealerships, you may not be given the 100% information you need to know about the policy; thus, you may end up paying more.

Also, when you buy gap coverage online, you curb the possible broker fee, which could cost up to 70% commission or more.

Hence, the best way to get GAP insurance coverage is by buying online. There are quite a bunch of insurers that allow you to process everything virtually.

But Do You Really Need Gap Insurance Coverage?

Getting insurance coverage for a used car can be very expensive, and you may think you do not need that.

When talking GAP insurance, it’s pretty obvious that it is not meant for everybody; yes, not everyone needs gap coverage for his car.

But there are things that signify you really need to get this coverage. For example, when you buy a car that depreciates faster in market value, GAP insurance may be very important for you.

Scenarios that signify you need GAP insurance coverage:

  • If you’re a driver that drives up to 15 miles or more within a year, you should consider GAP insurance.
  • When you sign up for a finance deal that would span more than 4 years, you need gap insurance protection to save you from paying more than the car’s market value when things go wrong.
  • If you’re going to make down payment less than 20% of the car price, you also need to consider this insurance coverage.
  • Another scenario is when you roll over a loan balance to purchase a new car; gap insurance may be highly beneficial in car theft or fatal accidents.
  • When you’re leasing a vehicle, it is advisable to purchase gap insurance.

Asides these reasons stated above, one may have other (personal) reasons for wanting to buy GAP insurance for a used car; however, you should make your research before finalizing the insurance deal with a particular insurer – compare and contrast prices/quotes from different entities.

Furthermore, if you’re convinced that you need to pick up GAP insurance for your used car, you may want to know how to get the best deal.

This leads us to the cost of GAP insurance and where you can buy.

What’s The Price for Used Car GAP Insurance?

No doubt, the car dealership will attempt to sell you a GAP insurance coverage once you’re applying for its car financing deal. Nevertheless, GAP insurance is not still offered by most dealerships.

So, there’s a chance the dealership doesn’t offer gap insurance policies, and that’s pretty good news because it costs more to buy it from a dealership.

GAP insurance may also cost you an additional $20 or $30 to your primary annual premium coverage (comprehensive and collision).

If you’re going to get GAP insurance, start with your current auto insurer – ask if the insurer offers GAP coverage; it may be cheaper when you get all your insurance coverage from one company.

Nevertheless, a lot of auto insurers do not accept that you add GAP insurance to your current insurance package. But, some popular names will allow you to do that.

Studies have proved that dealerships can charge up to 600% on average for a GAP policy when you purchase from them.

In contrast, an insurance company typically offers GAP policy at 5% to 6% of your existing collision and comprehensive policy.

Hence, if you pay around $800 for an annual premium, adding GAP insurance will incur roughly $40 or $50.

So, you’ll pay $840 annually for collision and comprehensive plus GAP coverage.

Nevertheless, different insurers or GAP coverage providers offer different rates; hence, while your primary auto insurer may seem to be offering the best deal, you should make extensive research and check what’s being offered by other GAP insurers.

Going with a big-name company is always beneficial – owning to the fact that they typically provide much flexibility.

Another thing is to know when to drop GAP insurance; you shouldn’t continue paying for GAP coverage when the loan balance below your car’s current value.

So, is GAP coverage Worth the Buy?

Yes, it is worth the buy if you’re leasing a car or paying for a car via a financing deal.

On the contrary, if you’re paying in cash, you definitely should not bother about GAP.

Also, for as long as you’re not getting the GAP coverage from a dealership, you’re obviously getting the best GAP coverage policy rates.

Note: you should NOT buy GAP coverage if you are on a short-term car financing deal – let’s say 6 – 24 months.

Can I Get A Refund?

A refund is possible when you sell or refinance the car prior to the car loan expiration.  

But there are things you should know to understand how this refund policy works. Normally, Gap policy payment is made upfront or integrated into the car loan.

Nevertheless, the GAP insurance only lasts for the duration of the car loan; that is to say, if the car loan is to last over 70 months, the GAP coverage will be paid for 70 months or annually, depending on how you apply.

Critical notice: when you refinance a car, get a new gap coverage for the new car.

Different insurers may have different refund policies; this is why it is advised to read through the legal pages or scripts of a company before agreeing to trust them with your money in return for their backing towards achieving a particular goal.

What more?

Apparently, this article has detailed a lot of information regarding how to pick up a perfect Gap insurance deal for a used car bought through car financing or lease agreement.

Also, this article has detailed the reasons why you should apply for this insurance policy, as well as explains why you may not need it.

Nevertheless, some key takeaways are worth emphasizing on over and again. They are main points from all these words written above.

  • Never apply for used car Gap insurance when you’re on a short-term loan or finance deal. The longer the loan duration, the more important it is to apply for GAP coverage.
  • GAP insurance covers reasonable costs at the event of a fatal accident or car theft while still repaying a car loan.
  • Don’t get confused about this – GAP insurance is optional and different from primary auto insurance policies. You can choose to get GAP coverage or not, but compressive and collision coverage is a MUST in some states.
  • Buying gap coverage from dealerships is over 100% costlier than buying from major insurers or your current insurance provider.
  • GAP insurance is typically 5 – 6% of your annual premium when you buy from major insurers.
  • This type of insurance is best for cars that depreciate very fast.

Final Words

Personal research is always required when you’re looking out for something. Ensure to research insurers and compare their rates before settling with the best deal.

Interestingly, you can read up more handy topics about “Used Cars” on our website; simply visit our homepage.

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