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GAP protection is intended to cover the difference between the value of your car at the time it's totaled and your outstanding loan balance, which you still are responsible for paying even if your car is sitting under 10 feet of water.
It pays to check with your credit union before you buy elsewhere.
Not everyone needs GAP coverage, but thanks to some significant changes in the way cars are bought and financed, more and more drivers are finding they could use the extra protection.
Do you need GAP protection?
Only car buyers who will owe more than their vehicle is worth need to consider GAP protection. For buyers putting little or no money down, rolling an unpaid balance on their old car loan into the new loan, or taking out an extended-term loan (60 months or longer), the need for GAP coverage may be obvious. Others have to take into consideration the expected depreciation on the car they're buying and the rate of equity accumulation through their auto loan. This will help you figure roughly how big a GAP you'll have and for how long.
A car starts depreciating as soon as you buy it, with the most drastic loss in value occurring as you drive off the lot and the vehicle goes from "new" to "used." To get some idea of the anticipated depreciation amount, try the calculator at CarPrice.com. (On the "Select your page to visit" drop-down menu at the bottom of the page, choose "Calculators"; on the next page, choose "Depreciation Calculator".) Bear in mind that cars depreciate at different rates, so a calculator that doesn't consider the vehicle's make and model really can give only a rough estimate. You may be able to tweak that estimate by factoring in past depreciation on a specific car type. Check Kelley Blue Book online to see how much last year's model is worth today. Ultimately, any depreciation estimate is really just an educated guess. Additional vehicle pricing information can be found in Sun East's Auto Center on our website.
Between the value of your car and the balance of your auto loan is a GAP that isn't covered.
Some buyers don't have to decide about GAP insurance at all. Sometimes the lender or leasing company includes the coverage in the agreement for the lender's protection. This is particularly common in lease contracts. For others, the decision to buy GAP coverage is just the first step: Deciding whom to buy it from is the bigger challenge.
Imagine having to continue making loan payments on a vehicle you can no longer drive.
Most often, people purchase GAP coverage through the lender--usually the dealership, a credit union, or bank--at the time of the purchase or loan transaction. The cost is normally a one-time charge, typically the same set price for all customers buying the same coverage. Buyers may roll the fee into the total loan amount and include it in the monthly loan payments.
As is the case with auto financing, dealerships rarely offer the best price for GAP coverage. According to Rich Fischer, vice president of credit insurance products for CUNA Mutual Group, which provides financial services and products to credit unions and their members, the average retail price for GAP coverage through a dealer is around $500. That same coverage through a credit union typically will cost around $250 or $300, proving that it pays to check with your credit union before buying elsewhere. GAP coverage through Sun East is $279.
While saving a few hundred dollars on GAP protection is nice, the bigger incentive to shop around is the much greater savings from a lower interest rate on your loan. According to the comparison of bank and credit union loan rates from Datatrac on cuna.org, in December 2004, the average rate for a 48-month new-car loan from a bank was two percentage points more than through a credit union.
The bigger incentive to shop around is the lower interest rate on your loan.
On a $20,000 loan at 5% interest, that nearly two-percentage-point rate difference would save the credit union borrower a whopping $880 over the course of the loan. You'll likely see the same--or greater--savings when comparing credit union rates against car dealers' rates. (Tip: When comparing financing offers, be sure the dealership commits to a financing rate and car price that considers your income and credit information. Some dealers increase the vehicle price to compensate for a lower interest rate, or tell you that, based on your credit score, you don't actually qualify for the low interest rate they originally quoted.)
If you have several GAP coverage alternatives, don't decide solely on price. Less expensive coverage may actually offer less protection than another, more expensive, waiver. For example, the most basic coverage pays the difference between the insurance settlement and your outstanding loan balance. Another type of coverage reimburses you for the insurance deductible as well. And still other offerings include features such as vehicle replacement, even if the price has gone up, or a thousand dollars to put toward a new car. The latter is exactly what you'll find at Sun East. When you purchase a new vehicle within 60 days of the settlement of the damaged vehicle, you will receive $1,000 toward the price of the car. This is in addition to your GAP settlement, which covers 125% of the value of the vehicle if it is totaled.
When shopping for GAP coverage, you should:
- Compare any quotes on GAP coverage and auto financing with what your credit union can offer you.
- Understand the benefits offered with each option and compare apples to apples.
- Read your lease or GAP coverage document to make sure you're covered for all types of total losses, including accident, theft, and natural disaster.
It's not uncommon these days for car buyers to start out as much as $15,000 in the hole, so GAP coverage can provide a great value for the money. "Even $500 at the dealer is better than nothing if you're seriously in the hole," says Fischer about the cost of GAP coverage. Of course, he'd rather you call your credit union and save.
Owing significantly more than your car is worth is a warning sign.
Understand that owing significantly more than your car is worth might be a warning sign that you can't really afford a new car in the first place. Before you sign on the dotted line, consider driving your current car a little longer, or buying a less expensive car so you can borrow less. If you buy a used vehicle, you'll also avoid the steep depreciation new cars suffer in the first few years. And without a mountain of debt to worry about, you can sit back and enjoy the ride.
Many people don't think they need GAP coverage, but unless you're making a large down payment on the car, you need it. Buy it. It's worth it.
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