Is GAP Insurance Worth it on a Used Car?
Last Updated on March 16, 2022
Guaranteed asset protection insurance, more commonly referred to as GAP insurance, is an add-on insurance coverage option. This type of insurance is intended to cover the value of a vehicle between the amount that you still have to pay for it and the amount that the vehicle is really worth. While this type of insurance is often recommended for new cars that are financed, is it actually worth it on a used car? Continue reading below as we help you make your decision as to whether or not to buy GAP insurance for your used vehicle.
What Is GAP Insurance Used For?
As soon as you drive your vehicle off of a car lot, whether it is brand new or used, its value significantly depreciates. If you have a new car, this means that the amount that there is a large discrepancy between the amount that you paid and the amount the actual value of the car. If you were to get into a car accident and the vehicle was totaled, the amount that your insurance company will pay out will be less than the amount you paid for the car. Why? – Because insurance providers will only cover the actual value of the vehicle that they insure.
If your car is totaled and you still owe money on it, but your insurance company only pays for the value of the car, you will be responsible for any remaining amount that has to be paid to your lender. For instance, if you borrowed $30,000 to pay for the car, you only paid $4,000 off of the loan, the car is totaled and the actual value is $20,000, your insurance company will only pay out $20,000. You will be responsible for paying the remaining $6,000 that you owe to your lender.
If in this hypothetical situation, you had GAP insurance, the company that provides the policy will pay out the $6,000. In other words, GAP insurance prevents you from losing out on money.
GAP Insurance: Is it Worth It?
Generally, GAP insurance is considered protection for new vehicles. This is particularly true if you are purchasing a new vehicle and are putting down a very minimal amount of money or you are financing the entire purchase price – and you are taking out a long-term loan (longer than 48 months). The reason? – Because, as mentioned, the value of a new vehicle depreciates very quickly.
If you have financed the majority of the purchase price on a long-term loan, there’s a good chance that, if you were in a car accident, you would owe significantly more money to your lender than your insurance company will pay. GAP insurance would protect you from having to pay out the difference and could save you a substantial amount of money.
If you are buying a new car, GAP insurance could be very well worth your while.
GAP Insurance and Used Cars
But what if you are buying a used car? Is GAP insurance worth it? The answer (like with most questions related to auto insurance): It depends.
Depending on your unique situation, purchasing GAP insurance coverage may or may not be worth your while.
When it’s Worth It
If you are buying a used car and any of the following apply to you, GAP insurance may be a good idea:
- You are buying a newer used vehicle; for instance, if it’s only a year old.
- You are putting down a minimal amount of money on the car.
- You aren’t putting any money down on the car.
- You are taking out a long-term loan.
Just like with a new car, GAP insurance can be a valuable asset in any of the above-mentioned scenarios. It could help you avoid paying a large sum of money out of your own pocket if you are involved in an accident.
When it’s Not Worth It
If you are purchasing a used vehicle and any of the following situations apply, it’s probably a better idea to forego GAP insurance:
- The car is older; 5 years or more, for example. The value of an older car is less likely to drastically depreciate; therefore, you are probably paying the actual value of the car, or close to it.
- You are putting a large amount of money down on the car and are only financing a small portion; generally, 20 percent or more.
- You are paying for the car outright; in other words, you aren’t financing it at all.
In these types of scenarios, the GAP insurance coverage will probably cost you more than you would have to pay out of your own pocket in the event that you are involved in an accident. Also, if you are expecting gap insurance to pay for things like wear and tear, maintenance, or mechanical issues, you will be in for a rude awakening. There is a long list of things that GAP insurance does not pay for.
Final Word – Is GAP Insurance Worth it on Used Cars?
To find out if GAP insurance is something you should (or shouldn’t) purchase, speak to a reputable insurance provider. Together, you can determine whether or not this type of coverage will actually be beneficial for you. If you still aren’t sure, consider the pros and cons of carrying this type of coverage (including the amount you are paying for the car, the amount you are financing, the age of the vehicle, and the actual value) to determine if this type of coverage is worthwhile.