Orlando Harmon
GAP insurance is a type of auto insurance that covers the difference between the value of your car and the amount you owe on it if it is financed or leased and is damaged or stolen. Dave Ramsey, a personal finance expert, generally advises against taking out car loans and instead recommends paying for vehicles in cash. However, he acknowledges that some people choose to take out car loans and may want GAP insurance to protect their finances in the event of an accident. While Ramsey does not specifically recommend GAP insurance, he suggests that those considering it should consult an Endorsed Local Provider (ELP) to determine if it aligns with their financial goals and circumstances.
| Characteristics | Values |
|---|---|
| When is GAP insurance worth it? | When the amount owed on a car is greater than the value of the car |
| When is GAP insurance not worth it? | When the difference between the car loan balance and the car's actual cash value is small |
| What does GAP insurance cover? | The difference between the value of a car if it's totaled or stolen and the amount still owed on the car loan |
| When is GAP insurance not helpful? | When the car is still drivable, even if it has been damaged |
| Dave Ramsey's recommendation | Skip GAP insurance and buy a used car with cash. If you have a car loan, pay it off quickly and drop the GAP coverage |
| How to get advice on whether you need GAP insurance | Contact an Endorsed Local Provider (ELP) |
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What You'll Learn
When is GAP insurance useful?
GAP insurance is useful when you have an outstanding loan on a financed car. It covers the difference between the value of your car and the amount you still owe on the loan if the car is totaled or stolen. This can offer financial protection and peace of mind in certain situations. For example, if you have a low down payment (less than 20%) and a long-term loan (60 months or more), your car ownership will likely be "upside down" for the first few years, meaning the amount you owe is greater than the value of your car. In this case, GAP insurance can be beneficial during that time.
It is also useful when you have leased a car. GAP insurance will cover the difference between the amount you receive for your destroyed car and your lease balance. This can be a significant advantage, as you may need to pay off the remaining lease balance even if your leased car is totaled.
However, it's important to note that GAP insurance is not recommended by Dave Ramsey, who suggests buying a used car with cash to avoid the need for GAP coverage. He recommends avoiding car loans and leases altogether. If you already have a car loan, his advice is to pay it off as soon as possible to eliminate the need for GAP insurance and lower your insurance premium.
Additionally, GAP insurance does not cover all car-related incidents. It will not help with routine repairs or minor accidents where the car is still drivable. It is meant to protect you financially in the event of a total loss or theft of your vehicle when you have an outstanding loan or lease balance.
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When you don't need GAP insurance
Gap insurance is not always necessary. In fact, it is not recommended in certain situations. Here are some scenarios where you may not need GAP insurance:
When You Own the Vehicle
If you own your car outright and have no outstanding loans or leases, GAP insurance is not necessary. In this case, your car's value is not tied to any financial obligations, and GAP insurance is designed to cover the difference between the vehicle's value and the amount owed.
When the Difference Between the Car's Value and Loan Amount is Small
If the gap between what you owe on your car loan and the car's actual cash value (ACV) is relatively small, GAP insurance may not be worth the cost. In this case, you may be able to cover the difference without insurance. This scenario is more common when you have made a substantial down payment or have a shorter financing term.
When You Have Comprehensive and Collision Coverage
GAP insurance is designed to work in tandem with comprehensive and collision insurance. If you have comprehensive and collision coverage, they will pay for the damage to your car in the event of accidents, fire, or theft. If the value of your car after such an incident is greater than the remaining loan amount, GAP insurance may not be necessary.
When You Can Afford to Pay Off the Loan Quickly
If you have the financial means to pay off your car loan within a short period, GAP insurance may not be a requirement. Dave Ramsey, a well-known personal finance coach, suggests that if you can pay off your vehicle within two years, you can consider keeping it. This advice is based on the assumption that you will be able to manage the debt and minimize the risk of owing more than the car's value.
When You Are Not Concerned About Total Loss
GAP insurance primarily covers the difference in the event of a total loss, such as when your car is stolen or totaled in an accident. If you are comfortable with your standard comprehensive and collision coverage, and you are not worried about the potential gap between the payout and your loan balance, then GAP insurance may not be a necessary addition.
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How GAP insurance works with other insurance
GAP insurance is designed to work in tandem with collision and comprehensive insurance. It is a supplementary form of insurance that covers the difference between the value of your car and the amount you owe on it, in the event that your car is deemed a total loss. This means that GAP insurance does not function independently, and you must have collision and comprehensive insurance on your policy for GAP insurance to be effective.
In the event of a total loss, your collision or comprehensive insurance will pay out the value of the vehicle, and GAP insurance will cover the difference between this amount and the balance still due on your car loan or lease. This is particularly useful if you owe more on your car loan than the car's current value, a situation known as being upside-down on your loan. GAP insurance can help protect you from negative equity or depreciation, ensuring that you are not left with a large bill after your insurance payout.
For example, if you owe $25,000 on your car loan and your car is deemed a total loss, your insurer may value the car at $20,000. With GAP insurance, you would receive the full $25,000 (minus your deductible) to pay off your loan, rather than just the $20,000 value of the car. This can provide significant financial protection and peace of mind, especially for low down payments, long-term loans, or vehicles with high depreciation rates.
It is important to note that GAP insurance does not cover other property damage, injuries, engine failure, or repairs resulting from an accident. Additionally, it is not meant to provide a down payment on a new vehicle. The purpose of GAP insurance is solely to bridge the gap between your insurance payout and your loan balance in the event of a total loss, ensuring that you are not burdened with additional debt.
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Dave Ramsey's recommended auto insurance coverage
Dave Ramsey, a finance expert, has offered some advice on the best kinds of auto insurance to purchase. According to Ramsey, there are three specific kinds of auto insurance everyone should have, which he refers to as "The Big Three": liability, comprehensive, and collision coverage.
Liability coverage is particularly important because most states require it. Ramsey suggests opting for at least $500,000 worth of liability insurance coverage to avoid falling into debt in case of an accident involving bodily injury and property damage.
Comprehensive and collision coverage, on the other hand, will repair or replace your vehicle if it is damaged by a natural disaster, stolen, or involved in a collision with another vehicle, object, or individual.
While Ramsey recommends these three types of coverage as the basics, he also acknowledges that the specific needs of drivers may vary. For example, if you have a loan or lease a car, GAP insurance can be a smart addition to your coverage. GAP insurance covers the difference between the value of your car if it is totaled or stolen and the amount you still owe on the loan or lease. However, Ramsey emphasizes that it is best to buy a used car with cash to avoid the need for GAP insurance and the financial headaches that come with car loans.
To find the right coverage at the best price, Ramsey suggests speaking with an independent insurance agent or connecting with one of his Endorsed Local Providers (ELPs). These professionals can help you navigate the confusing world of insurance and ensure you have the protection you need without unnecessary add-ons. Additionally, bundling your home and auto policies can be a great way to save on insurance costs.
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How to save money on auto insurance
While GAP insurance can offer financial protection and peace of mind for car purchases and leases, it is worth considering when it is useful and when it is unnecessary. GAP insurance covers the difference between the value of your car if it is totalled or stolen and the amount you still owe on the car if it is financed or leased. It is recommended if you have a low down payment (less than 20%) and a long-term loan (60 months or more). However, it is not necessary if the difference between your car loan balance and the car's actual cash value is small.
- Compare insurance rates for different vehicles before purchasing a car. Safe and moderately priced cars, such as small SUVs, tend to be cheaper to insure than expensive and flashy cars.
- Choose a higher deductible on your car insurance to lower your premium costs. Ensure you have enough money set aside to pay the higher deductible if needed.
- Insurers often offer discounts for safety features that reduce the risk of car theft or personal injuries, or for cars with a good safety record.
- Ask your insurer about available discounts, such as multi-policy discounts for bundling home and auto insurance or insuring multiple vehicles.
- Establish a solid credit history, as many insurers use credit information to price auto insurance policies.
- Consider usage-based insurance, where your driving behaviour is tracked, but be aware that this data could potentially be used against you if you are at fault in an accident.
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Frequently asked questions
GAP insurance covers the difference between the value of your car if it’s totalled or stolen and the amount that you still owe on the car if it’s financed or leased.
Dave Ramsey recommends buying GAP insurance if your loan amount is more than the car's depreciated value. However, he advises against car loans and leases in the first place, suggesting that people buy their cars with cash.
GAP insurance works together with collision and comprehensive insurance. You must have collision and comprehensive insurance on your policy in addition to GAP insurance.
