With auto loan interest rates at the lowest they've been in years, it's a great time to buy a car! However, as a finance guy, it's common for me to see a lot of customers that come in with zero money down. One reason for this might be the low interest rates, and low interest rates translates to lower payments. Another reason might be that many folks, especially those middle-class and below, are still struggling in the wake of our economic downturn.
Regardless of why customers choose to not put money down, the fact remains that many folks quickly find themselves under water on the car loans. This is especially true on newer car loans where banks lend more money to allow for after-sale items like warranties, paint protection, tire and wheel protection, and pre-paid maintenance. Plus, as we all know, new cars depreciate quickly, whereas slightly used cars have already taken that initial "hit" in depreciation for you.
Now, on to GAP insurance. What does it do? It protects you in the event that you're upside down on your car loan and insurance declares the car a total loss. As vehicles get older and accumulate mileage, their values drop over time. Say you're driving to work one day, and you're thinking hard about the balance of your auto loan, which happens to be around $15,000, and before you know it, you've rear ended the pickup truck in front of you. The truck is unscathed, however, your vehicle is nothing but scrap metal. Your insurance company comes to the rescue! Well, sort of. Their appraiser determines that your vehicle is worth $12,000, and it's totaled. If you had GAP insurance, the remaining $3,000 of your loan would be paid for, as well as your insurance deductible (usually up to $1,000). But back when you bought the car you thought you didn't need the GAP insurance, and you told the finance guy you were planning to pay it off in a year or two. Sadly, that didn't happen. Your AC unit went out last summer, there was a surprise visit to the doctor when you kid broke his arm, and when you chopped your tree down it just so happened to land on your neighbors muscle car. Life happens, plans change, and you didn't pay off the car like you had planned.
Now, here's the question. When is GAP insurance right for me? you might wonder. The general rule of thumb that I tell my customers is that unless they put 20-30% down, they should probably get the GAP insurance. Another thing to consider is the amount of driving a person does and how long their loan term is. For example, someone who drives 5,000 miles per year and is financing for 48 months will have a lower risk than someone driving 25,000 miles per year and has a 72 month loan. Additionally, while it's difficult to project future values of vehicles, the brand of the vehicle will have an impact on resale value. A BMW, generally speaking, will hold their value better than a Kia.
I hope that helps give you an insight into GAP insurance and how you can use it (or deny it) to your advantage. Another note...GAP insurance is almost always negotiable. Dealerships that charge $700-$800 for GAP insurance are simply padding their profit. A fair GAP price is in the $500-$600 range.
Thanks for reading!