How to Know if You Need GAP Insurance or Not
Though GAP insurance is an important addition to your insurance policy, there are a few occasions when you may not need it (See Article On GAP Insurance). These circumstances only apply to a small population, but it is good to review them so you can determine the right choice for yourself.
Remember that GAP insurance is used when your car is totaled, and you owe more on your auto loan than the cash value of your car. Here are two ways to try to avoid the need of GAP Insurance coverage:
- Buy Your Car Cash
One way you can avoid owing more on your car than it is worth, and thus needing GAP insurance, is by buying the car cash. That means paying the full cost of the vehicle when you buy it and not taking out a loan that would ensure an APR. This sounds like an ideal situation, but the reality is that it is not a realistic scenario for the vast majority of car buyers.
- Having a Big Down Payment
Another scenario in which you might not need GAP insurance is by putting down a significant amount of money on your car loan. For instance, if you want to buy a car for $16,000 but can’t put any money down on it, you would have to take out a loan of $16,000 that would accrue interest. You may end up paying anywhere from $18,000 to $25,000 for this car due to interest over time.
However, if you wanted the $16,000 car and put down $8,000 on the car, you would only need an $8,000 loan which means the interest would have less impact on your balance over time. In this scenario, it would still be a good idea to look at GAP insurance in case you still end up owing more on the car than its value but having a big down payment may lower the amount of GAP you need in the long run.
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