Gap coverage covers…well, gaps
Those of us who have ever bothered with car dealerships have likely had “gap coverage” offered at some point, and not everyone understands what it means. Granted, the F&I guy should make it pretty clear, but not everyone understands the intricacies of buyingamatating them that there car-a-ma-bobs.
Gap coverage is an insurance policy against loss of the asset (namely the vehicle) while said asset is in a period of negative equity. Negative equity, for the low and uninitiated, is when more is owed on the loan to acquire an asset than said asset is worth in fair market value. Colloquially, it’s called being “upside down” or “underwater.” (Ask homeowners in California.)
Gap coverage insures against potential disasters during this period.
The loan aquatic
Cars are one of the worst purchases one can make – financially – due to the rapid, vituperative, and indeed rapacious depreciation of the asset, which is why gap coverage makes sense. Here’s what I mean:
Cars lose value the second you drive off the lot. Sometimes it’s 10 percent, sometimes more. After that, they continue to depreciate faster than the person who took out the loan to buy the damn thing can pay off the debt they incurred to make the purchase, meaning the purchaser (you don’t own anything until it’s paid off, dummy) owes more for it than it’s worth.
Eventually, you reach a break-even point, where remaining debt is equal to or lesser than the fair-market value of the car.
Gap coverage enters into the equation thusly: Say you buy a car for $20,000. Two years later, you owe $16,500 but due to depreciation, the car is only worth $13,000. One day, you get broadsided by an idiot driving a pickup (many seem to do so) and your car is totaled. Insurance pays fair market value – $13,000 – but you owe $16,500, leaving $3,500 due for a car bound for the compactor.
Gap coverage pays the difference between what you owe and what the car is worth.
Is it worth it?
Whether gap coverage or any other insurance is “worth it” depends. Yes, it adds to your car payment, but hardly that much depending on circumstances; most dealerships will offer it for a small monthly rate, but then again, so will most insurance companies.
As far as the cost goes, talk to an auto insurance agent, or several – some might throw it in for free if you’re upgrading coverage levels. Like any insurance, it’s one of those things that you hope you won’t need but will be glad you do should you.
Republished by Blog Post Promoter