Smart Dealer Gap Insurance – How It Works

Smart Dealership gap insurance is an insurance product that protects the buyer in a difference between the loan amount and a car's value if the car suffers a total loss, protecting you from a potentially large bill. For instance, if you total your car while you still have a loan on it, and the insurance company says the car is worth $5,000, but you still owe $10,000, the policy will kick in to buy out your contract.

The primary benefit of this type of coverage is, of course, the fact that you will not be left holding a big bill if you total your car. Becoming upside down in a car loan is very easy to do, and thus many people consider purchasing these policies. In fact, car buyers who put little down on their purchase find that they can benefit from this type of coverage from the moment they drive off of the lot, simply because of the quick depreciation on new vehicles. However, before you decide to purchase gap insurance, make sure it is something you can truly benefit from and that you are getting a fair price.

Cons of Smart Dealer Gap Insurance

While dealer gap insurance comes in very handy if you total your car, the chances of totaling your car are somewhat slim. Also, you may have a large down payment to put down on your vehicle. If this is the case, you will not need a gap policy, because you may not become upside down in the loan very quickly.

These insurance policies are not transferable. If you decide to sell the vehicle, you cannot transfer it with the title. If you decide to get a different vehicle, you are simply out the money and will have to purchase a new gap insurance plan on your new vehicle. You cannot even transfer the policy if you decide to refinance your car loan. Unless you plan to stick with the loan until you pay it off, this type of policy is a bad idea.

Gap insurance plans limit the length of the loan contracts that they will cover. If your loan will be longer than four or five years, you can expect to have the gap insurance denied. Also, you must decide to purchase the policy in the first 12 months of the purchase of your vehicle.

Why Is It So Expensive?

Dealership gap insurance is particularly expensive. You can expect to pay between 5 and 6 percent of the premium for your collision and comprehensive coverage if you purchase this product. What you may not know is that you can purchase this insurance from several sources, not just the dealership.

If you take the time to shop online, you will find it far more affordable. The dealership must pay the overhead of the sales floor, staff, and vehicle care. Also, gap insurance sold online is often sold at a "volume" price. If you do decide to purchase a gap policy, shop around to make sure the offer at the dealership is fair. In addition to shopping online, you can also shop with your insurance provider.

Keep in mind that the products offered through these various venues are all basically the same. The dealership does not have exclusive access to a special product, but rather works as a retailer for gap insurance, just as the online seller does. The policies may actually be completely identical.

Is It Right for You?

Even with the drawbacks, some people will find that gap insurance is a necessary policy to have. The sad truth is that the moment you drive off of the lot in your new vehicle, your auto insurance policy may not offer sufficient protection for a total loss, because the simple fact that the vehicle now has an owner will lessen its value. The average new vehicle takes a 30 percent loss in value in the first year alone.

So who should buy this coverage? If you are able to put a 20 percent or larger down payment on the purchase, you probably do not need it. However, those who finance for over 60 years, opt to lease the vehicle rather than buy it, drive over 15,000 miles a year, or purchase a vehicle with high depreciation rates all need to consider it. These are the individuals who would be left holding a bill for thousands of dollars after a crash or other accident.

Keep in mind that gap insurance is only for new vehicles, not used ones. Chances are the loan on your used vehicle will not necessitate this type of coverage. Also, before you buy, talk to your car insurance provider. You may find that gap insurance is built into the package you have purchased. If it is not and you fear a big gap after an accident, consider buying it as a safety net, but shop around first to ensure you are getting the best possible price.