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Is GAP Insurance Worth It?

When you buy a new car you will probably get offered something called GAP insurance. This is called Guaranteed Asset Protection by some people and Guaranteed Auto Protection by others.

As with all types of insurance policy, if you take it out there is no guarantee that you will ever use it. However, in order to understand whether or not it is worth paying for GAP insurance we need to learn a bit more about the subject.

What Is It?

Simply put, GAP insurance is designed to cover you if your vehicle is written off or stolen. Of course, when you make a claim on a stolen or completely written off car you don’t always get paid the amount you expected. This is because the insurance company will give you what they think the car is worth now. This is where the GAP insurance policy will kick in. It will do this by paying out the difference between what you paid for the car and what the insurer pays out. So, in what type of circumstances would it be worth it?

When Is It Worthwhile?

A good example of when this type of insurance could be useful is when you buy a car with the help of a loan and put a very small amount towards it in cash. In this case, if you were to make a claim the money you get paid might not be enough to pay off what you still owe. This problem could be made worse in a couple of different circumstances. First of all, if you have bought a car that depreciates very quickly. While all brand new cars lose a chunk of their value when you drive the first few metres off the dealership lot, some depreciate more quickly than others. In fact, some have even been found to lose close to half their value after 3 years of ownership. Having a car like this written off can lead to big problems if you took out a large loan to buy it. Another case when it is worth looking at GAP insurance is when you took out the car loan for a long period of time. The early part of any loan is dedicated to paying off interest and very little of the capital amount. This means that if you have a long loan term then it will be a while before you starting eating into the amount you owe. Again, losing the car and getting a small insurance payout would be a disaster in this case.

When Is It Not Worthwhile?

As with any type of insurance, you will not want to take it out if you feel that you could handle the situation without it. This means that if you have enough money to deal with any shortfall resulting from any insurance claim you might make. This could be because of the fact that you only took out a small loan to start with or because you are confident the car won’t lose value very quickly over the first years.

Summary

Whenever you take out an insurance policy you can be sure that one of two things will happen; you will either claim on it or not. If you don’t claim on it then you will have paid the premium without any financial return but will have gained some peace of mind. If you claim on it then it could help you out of a very sticky situation. By thinking a little bit about your situation and the points we have already looked at, it should be pretty clear whether GAP insurance is worth it to you or whether it is not.

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