The Gap is more than just a store at the mall

The Gap is more than just a store at the mall

One of the topics that we find ourselves explaining to our clients when they purchase a new vehicle is Gap coverage.  So what is Gap coverage?  Let's take Carrie as an example.

Carrie decided to buy a 2011 Ford Edge SEL.  She purchased the car for $29,887 and put down a $5,000 deposit.  She financed $24,900.  With interest, she owes about $27, 524.   Now according to the Depreciation Infografic on, the minute she drove off the lot, her car lost about $2,559 in value and was only worth $27,314.  And buying a 2011 -- on January 1st, 2012, the car would be a year old and would now be worth only $24,186.  At that time, she will have made two payments on the loan.  Carrie carries a $500 deductible on her collision coverage.

If Carrie is in an accident on January 2, she will still owe about $27,000 and the company will only pay her about $23,500.  The difference, about $3500, will have to come out of Carrie’s pocket.  Unless Carrie purchases Gap Insurance.  Gap Insurance will pay the difference between what you owe the bank or finance company and what your car is actually worth with depreciation.

There are two ways you can buy Gap Insurance.  You can purchase the coverage from your car dealer and the cost is added into the loan.  Between the initial cost of the coverage and the interest over the life of the loan, you could end up spending between $400 and $600.    The other way is to purchase the insurance from your local insurance agent as an endorsement on your auto policy.  Depending on your company, the cost is generally $30 to $60 a year.  You will only need the coverage for a year or two, until you are no longer upside down in your loan.  You want to add it when you add the car as a lot of companies only add it within the first 30 days of your owning the vehicle.

One other way to take care of the Gap is to buy Replacement Cost Coverage on your car. Every company does this differently but in general, for a specified time, 3 years, 5 years or whatever length of time, they offer to replace your totaled vehicle with either one year newer vehicle or the current year vehicle.  So in the case of one of our companies, if Carrie had an accident in 2014, (this company offers 5 years of coverage) they will replace Carrie’s 2011 Ford Edge with a 2014 Ford Edge.

If you put down a substantial down payment or trade in a high value vehicle you may not need Gap Coverage.  You may owe far less than your car is worth.  And if you used alternate financing, such as a personal loan or a home equity loan, the Gap Coverage won’t pay out.  Coverage is only activated if there is a loan that uses the vehicle itself as the collateral.

Talk to your agent if you aren’t sure if you need Gap Insurance and to find out if Replacement Cost Coverage is available on your policy.  And enjoy your new vehicle!

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