may 2010

Buying a new car? You may have heard about GAP insurance while sitting in the finance officer's office. Its coverage offered by the dealership that protects you from owing the balance of the loan if your vehicle is deemed a total loss.

Heres how it works:
Lets say you buy car for $12,000 today with a 5 year loan. In two years, you get into an accident and your insurance company deems the car totaled. Now insurance companies don't pay out what the balance is of the loan on the car, they "blue book" it. Meaning they look at the condition of your car at the time of the accident, how many miles are on the vehicle, and the area you live in. So now you have a totaled car and lets say $9000 left on your loan. The insurance company says the car is worth $7,500 and you have a $500 deductible. So they will send you a check for $7,000 and that will be the end of it. Now you still have $2,000 left on the loan that you are responsible for paying. This is where the GAP insurance comes in. If you purchased the GAP insurance at the time you purchased the vehicle, they would pay the remaining balance on the loan and you end up with a clean slate!

The cost of GAP insurance varies. It ranges from about $450-$750 depending on which company you get it through. If you incorporate the cost into your loan, its about $15-$20 per month tacked on to your monthly payments on a 5 year loan. It may be something to think about when you purchase your next car.