Gap Insurance: Dealerships' Secret Weapon

When you buy a new car, the dealership will likely offer you gap insurance as part of the sales pitch. Dealerships profit from selling gap insurance – they can retain commissions as high as 50% of the policy premium. But you don't have to buy gap insurance from a dealership. In fact, it's usually more expensive to do so. You can also buy it from lenders, credit unions, or your auto insurance company.

Gap insurance is optional

When you buy a new car, it loses value the moment you drive it off the lot. The minute you sign the paperwork, your vehicle goes from being a new car to being a used automobile, and its value immediately decreases. If you were to have an accident in that brand-new car, your insurance company probably wouldn't cover the cost of what you owe on it. They would only cover the cost of replacing your vehicle with one of the same value. This is why you might consider buying gap insurance when you purchase a new car.

Gap insurance is typically only available for brand-new vehicles or for models that are less than three years old. It is usually more expensive to purchase gap insurance from a dealership than from an insurer. If you buy gap insurance from a dealer, it will likely be bundled into your loan amount, which means you'll pay interest on your gap coverage.

Your lender may require some form of gap coverage when you finance your car. However, your lender may include a gap waiver in your loan or lease, which eliminates the need for gap insurance. You can also typically get gap insurance through your auto insurer. Some insurers might sell gap insurance as a standalone policy, but it's more commonly added to your existing auto insurance policy.

It covers the difference between your car's value and loan amount

When you buy a car, it loses value the moment you drive it off the lot. In fact, the minute you sign the paperwork, your vehicle goes from being a new car to being a used automobile, and its value immediately decreases. This is where gap insurance comes in. Also known as guaranteed auto protection insurance, it covers the difference between your car's depreciated value and what you actually owe on your auto loan if your car is stolen or totaled.

For example, let's say you purchase a vehicle brand new for $35,000. The moment you drive it off the lot, the value drops. It may now only be worth $27,000. If you are in an accident, your auto insurance will pay the replacement cost of the vehicle, which is $27,000. You are still $7,000 short. Gap insurance would make up this difference.

Gap insurance is typically offered by dealerships when you purchase a new car. However, it is important to note that dealership gap insurance is usually more expensive than purchasing it from another source, such as a lender or credit union. This is because the cost of the coverage is often bundled into your loan amount, which means you end up paying interest on your gap coverage.

When purchased from a dealer, gap insurance can cost several hundred dollars or more, spread equally throughout your loan payments and therefore subject to interest. On the other hand, when purchased through an insurer, your premium will only increase by a minimal amount, and you can choose to remove it when it is no longer needed.

It's more expensive at a dealership

When you purchase a vehicle from a car dealership, the sales pitch often includes gap insurance. Dealerships profit from gap insurance, retaining commissions as high as 50% of the policy premium. This is money that goes straight into their pocket, and it's why they push gap insurance so hard.

Gap insurance, also known as guaranteed auto protection insurance, covers the difference between your car's depreciated value and what you owe on your auto loan if your car is stolen or totalled. It's a wise investment if your vehicle is damaged or stolen within the first few years of ownership, as industry statistics show that new vehicles lose about 30% of their value in the first year and 20% in the second year.

However, you can get a better deal on gap insurance from other sources. When purchased at a dealership, gap insurance can cost several hundred dollars or more, spread equally throughout your loan payments and therefore subject to interest. By contrast, when purchased through your insurer, your premium will increase only minimally when you add the coverage, and you can choose to remove it when it no longer makes sense, potentially saving you money.

Some dealers include a cancellation period of 30 days, during which you can cancel your gap insurance and receive a full refund. However, if you cancel outside of this period, you'll still need to make any overdue payments, including interest accrued.

It's unnecessary for older vehicles

When you buy a vehicle from a car dealership, the sales pitch often includes gap insurance. This is because a car's value depreciates the moment it is driven off the lot. However, gap insurance is unnecessary for older vehicles.

Gap insurance, or guaranteed auto protection insurance, covers the difference between your car's depreciated value and what you owe on your auto loan if your car is stolen or totaled. It is typically required for leased vehicles and is a wise investment for new or slightly used vehicles, especially in the first few years of ownership.

However, as a vehicle ages, the gap between its market value and the loan amount owed on it decreases. Therefore, gap insurance becomes less critical over time. If you have made a substantial down payment on your vehicle or are paying off your loan in a short period, you may not need gap insurance at all.

Additionally, gap insurance is unnecessary if your vehicle is older and has already depreciated significantly. In this case, the gap between the market value and the loan amount is likely to be smaller, and you may be able to rely on your standard auto insurance coverage in the event of an accident or theft.

Before purchasing gap insurance for an older vehicle, it is essential to consider the vehicle's age, the loan amount, and the terms of your auto insurance policy. If the gap between the market value and the loan amount is minimal, gap insurance may be unnecessary, and you can avoid the additional cost.

It's not required in California

In California, gap insurance is not required by law. It is an optional coverage type for qualifying vehicles and cannot be made mandatory as a condition of a loan or auto sale. However, if you have a lease or loan agreement, your lender will most likely require you to purchase gap insurance.

Gap insurance, also known as guaranteed auto protection insurance, covers the difference between your car's depreciated value and what you owe on your auto loan if your car is stolen or totaled. It is important to note that gap insurance does not cover the cost of a new or replacement vehicle. Instead, it ensures that you don't have to continue making payments on a car that is a total loss.

The cost of gap insurance in California depends on factors such as the value of your car, the insurance company, your location, and your age. On average, gap insurance in California costs around $2,238 per year, but it can be as low as $20 to $40 per year if purchased through an independent agent.

While gap insurance is not required in California, it can provide valuable financial protection for car owners, especially if they have a lease or loan agreement. It is recommended to compare quotes from multiple sources, including insurance companies, stand-alone gap insurance providers, car dealers, and financial institutions, to find the best rate.

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