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Is Gap Insurance Worth the money?

What is gap insurance and is it worth the money on a used car?

Nicholas Hinrichsen - Published: August 27, 2020

If you bought GAP insurance from a dealership its NOT worth the money. Here are three reasons GAP insurance is NOT worth the money.

Reason 1: Gap Insurance is not worth buying from a dealership: It's WAY overpriced and available elsewhere. GAP Insurance is typically marked up 500% or more. Its available for much cheaper from your insurance company, or through your local credit union at cost.

Reason 2: Gap Insurance won't be need for a good portion of the loan: GAP insurance typically protects the value difference between your current loan balance and the vehicle's fair market value. If you've been paying for you vehicle for 3 years or more, there's a good chance that the vehicle is worth well more than the loan. Therefore, even if you wreck the vehicle GAP insurance won't pay a dime. So you're often left with paying for insurance over the loan life despite the fact that the insurance is only worthwhile during the beginning of the loan.

Reason 3: Gap insurance cost to benefit is rarely worth it unless you can't afford a large out of pocket expense. There's many insurance products that pay for "hugely outsized outcomes". Think of medical insurance, where a modest payment could offset a 0.01% chance of a $1,000,000 surgery. The reason insurance is so valuable here is that almost no individual could afford that surgery despite the low changes.

In the case of GAP insurance, the potential negative outcome is very limited in cost. Even for a brand new car the GAP between loan value and the car's current market price are rarely greater than $10,000 - and the chance of having total collision loss is still small. So with GAP insurance, you're paying a large insurance premium for a risk you may be able to take on yourself for cheaper.


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