Taking out an auto loan is an incredibly common way of financing a new car purchase, but often also a confusing one. There are so many different loans out there that it can be difficult to know which one to choose.
Alongside the already overwhelming number of options, many car dealerships and financial institutions will also offer vehicle gap protection, otherwise known as car gap insurance. What is gap protection on a vehicle? How does it work? Is it worth it? We go through the answers here.
How Does It Work?
Vehicles start to lose value as soon as you buy them, especially if they’re new. However, if you’ve chosen to finance your car with a loan, the loan amount usually goes down more slowly than the value of the car, leaving you with what’s called an upside-down loan—where the loan amount due is greater than the value of the car.
If you get into an accident at that point or the car is stolen, then the amount an insurance company will pay you is less than the amount you’ll have to pay to the dealership or bank. You could end up in a situation where you don’t have a car, but still have to pay back thousands of dollars!
Car gap insurance covers this gap between the value of the car and the amount of the loan. It means that if something does happen, the combination of the auto insurance and the car gap insurance will be enough to pay off the entire loan.
What Are the Costs?
In most circumstances, car gap insurance is highly affordable. Payments can be as low as $30 per annum, depending on the size and length of the original car loan and, in some cases, the type of vehicle and whether it’s new or used.
However, it’s important to know that this amount will be paid in full and upfront for the life of the loan and folded into the original loan amount. So, if your car gap insurance is $50 per year and the length of the loan is five years, $250 will be added to the loan amount from the beginning.
The other important piece of advice is to never buy your car gap insurance from the dealer. Salespeople are offered commissions on every type of insurance they sell and, in some cases, the premiums could be up to four times the amount you’d pay elsewhere.
When Is Car Gap Insurance Worth It?
Since the cost of car insurance is relatively low, car gap insurance is normally worth it, but this only holds true for when you have (or will soon have) an upside-down loan like in the following circumstances:
- Your initial down payment was low, so your initial loan amount was high.
- You drive a lot, so your car’s value depreciates more quickly.
- The duration of your loan is long, so the loan amount goes down slower.
- You’ve rolled over another car loan into this loan, making it much higher than the value of the car.
- You rely on only one car and can’t afford to be out of pocket.
- You own a luxury car, which tends to depreciate more quickly.
Peace of Mind and the Right Advice at TPFCU
At TPFCU, we understand that it can be confusing to sort through all the types of insurance. We understand that at the end of the day, you just want to do what’s right for you and your family.
We’ll always put your needs first. We pride ourselves on our objective and caring advice and always giving you what’s best for your circumstances. Whether it’s vehicle gap protection or a car loan that you can actually manage, we’re here to let you live the way you want to.
For peace of mind and the right advice, contact TPFCU, a federal credit union in Amarillo that’s always looking out for you. Call us today at (806) 359-8571 to find out how we can help.