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Consumer advocates loathe the add-ons that auto dealers often try to shoehorn into vehicle purchases. They see most of the extra fees as pointless ways of gouging customers. Indeed, if the dealer talks you into fabric protection, you could be shelling out something like $ 200 just to have the dealership spray down the interior with a $ 5 bottle of Scotchgard. While many dealer add-ons are pointless and should be tossed off the final purchase agreement, one of them, known as gap insurance, is a bit more complicated.
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A new car or truck loses as much as 20 percent of its value the moment it’s driven off a dealer lot. But most auto insurers only cover the replacement cost of the vehicle based on its current market value. Gap insurance, often considered an acronym for Guaranteed Asset Protection, is insurance to protect from depreciation, or fill in the “gap,” in the event of a total loss to the vehicle. So, if the brand-new car that you financed at $ 30,000 is totaled or stolen, but its market value is only $ 26,000, you’re not out $ 4000.
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Steve Lehto, a Michigan attorney and lemon-law specialist, insists that if you decide you want gap coverage, you should almost always get it through your auto insurer, not from the auto dealer, even though Lehto readily admits he’s “predisposed to disliking insurance companies.” Gap policies are often rolled into a dealer’s total vehicle financing, sometimes with little explanation. Lehto estimates you can buy the same insurance at half or even a quarter of the price from your own insurance carrier rather than through the dealer, which uses gap insurance as another tool to pad profits.
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Dealers, of course, would disagree. Ron Reahard, president of Tennessee-based Reahard & Associates, a consultant to dealership finance and insurance (F&I) departments, said that while gap insurance may seem cheaper through your insurance company, that coverage typically includes a deductible that you have to pay. Also, once you file a claim with your insurer, your rates are likely to go up. But the biggest reason coverage through a dealer could be beneficial, according to Reahard, is that your insurer is less likely to declare your car totaled. After all, it would rather repair a $ 26,000 car for $ 20,000 than make the lender whole if they’re on the hook for $ 30,000 with gap insurance. “They have every reason not to total your car if you have gap insurance through them,” Reahard said.
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One area where Lehto has concurred that gap coverage may be useful from a dealer is if it covers negative equity on a traded-in vehicle. That means if you still owed money on your trade-in but then totaled your brand-new car, the gap coverage would cover the former car’s negative equity, too.
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For its part, the Insurance Information Institute (III), an industry-backed nonprofit, recommends gap insurance if you make a down payment of less than 20 percent, are financing a new vehicle for 60 months or more, are leasing or buying a car that tends to depreciate quickly, or are rolling over negative equity from a previous loan. When purchased through traditional auto insurers, gap coverage with collision and comprehensive insurance adds as little as $ 20 a year to annual premiums, according to the III. This will vary by location, driving record, and the kind of vehicle you’re insuring.
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Rates and terms vary from state to state and carrier to carrier, too, so it’s important to have the issuer of the gap coverage give you a thorough explanation of what’s covered and what is not. Most agreements will call for consumers to be refunded any gap premium that has not been used if they pay off their loan early, and in nine states—Alabama, Colorado, Indiana, Iowa, Maryland, Massachusetts, Oklahoma, Oregon, and South Carolina—such a refund is required by law. (At least one bank, Wells Fargo, has had some trouble with this).
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So should you consider gap coverage? That depends on your level of aversion to risk. Lehto said he has seen situations in which people with brand-new cars have been in vehicle-totaling wrecks only to find out the insurance company would by no means pay all of what was still owed on the loan. “So it depends,” Lehto said. “I can’t say it’s not a good product. But if you’re going to buy it, you should shop it around and shop for a better price.”
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