Potential Pitfalls When Buying a Car - Shop Around for GAP
When you lease a vehicle or take out a loan to purchase a new car, you may want to consider adding GAP (Guaranteed Asset Protection). This coverage is beneficial if your vehicle is stolen or deemed by your insurance company to be a total loss after an accident. Under these circumstances, did you know that even though the car is no longer in your possession, you’re still obligated to pay the remaining balance on the lease or loan? This balance could amount to several thousand dollars in addition to the funds you’ll now need to buy a replacement vehicle.
With the loss of your car to theft or an accident, your auto insurance will pay you for the value of the car at that moment in time. However, this payment will likely not equal the car’s value when you first purchased it. As you’ve likely heard, your car loses value (depreciation) as soon as you drive it off the dealer’s lot. When you purchased your vehicle, if you took out a long-term loan (i.e., 84 or 96 months) or made a small down payment, the difference between the remaining loan balance vs. the current value could be substantial. Don’t forget the deductible either! As with any accident, you may be required to cover your deductible before the insurance company kicks in their payment.
With GAP, the difference between what your auto insurance pays for your “lost” vehicle and what you owe on your auto loan or lease, will be paid. In addition, some GAP policies also cover your auto insurance policy deductible.
To buy GAP coverage, you may purchase it from the dealer as an add-on. But a more economical option would be to take it out through your credit union when you obtain your auto loan or contact your auto insurance provider to see if they offer this coverage. And remember that it only makes sense to pay for GAP when you’re making lease or loan payments on your vehicle which exceed the vehicle’s current value. Once you’ve paid down the balance where the amount due now matches the value, GAP is no longer needed.