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I’m about to finance a new car for $30,000, and the dealer is pushing GAP insurance on me for $700. They say if my car gets totaled, my regular insurance might not cover what I still owe on the loan, and GAP would pay the difference. I’m putting $5,000 down, so my loan will be for $25,000. With the car losing value the second I drive it off the lot, I’m wondering if this extra insurance is really worth the cost. What are your experiences?
As someone with 8 years in Automotive Finance, I can tell you that GAP insurance is designed to cover the gap between what you owe on your vehicle and its actual cash value if it’s totaled. If you’re putting $5,000 down on a $30,000 car, your loan-to-value ratio is about 83% ($25,000 loan / $30,000 car). Many in the finance world recommend GAP if you’re above 80% loan-to-value. So, you’re right on the edge where it could be beneficial, especially in the early years of your 60 or 72-month loan.
I bought a new car once and it was totaled just one month later in an accident that wasn’t my fault. My regular insurance offered only 75% of the car’s value, leaving me owing $6,200 on a $28,700 loan. My GAP insurance, which cost me $590, covered that entire $6,200 difference. For me, that one-time $590 cost was absolutely worth avoiding being thousands of dollars in debt for a car I couldn’t even drive anymore.
From my experience as an insurance adjuster specializing in total loss vehicles, I’ve seen countless people regret not getting GAP. With your $5,000 down payment on a $30,000 car, you’ll likely be underwater almost immediately after factoring in taxes and fees. If your car depreciates by, say, 20% in the first year, its value would be around $24,000, and you’d still owe close to $23,000 (depending on your loan terms), creating a potential $1,000 gap that GAP insurance would cover.
I never get GAP insurance because I’ve always made sure to put down at least 20% or more on any car I buy. In your case, a $5,000 down payment on a $30,000 car is only about 16.7%. If you had put down $6,000, bringing your loan to $24,000, the initial gap would be smaller, and you might feel more comfortable without GAP, relying on the fact that Hondas typically don’t depreciate very fast.
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