Should You Buy GAP Insurance?

The reason: new cars tend to depreciate very quickly. So quickly, in fact, that your loan payments may not make up for the depreciation loss during the first half of your loan term.

It all depends on the amount of your down payment and the rate of depreciation on your particular vehicle.

This usually isn't a problem, but if your car happens to get stolen or totaled during an accident or fire, your insurance will only cover the value of the vehicle at the time of the loss.

If you owe more on the loan than what the vehicle is worth, you will have to pay that out of pocket. In some cases, this can be several thousand dollars.

This is where GAP insurance comes to the rescue. It will pay off the difference including any deductible required by your car insurance company.

GAP insurance is especially useful in cases where you traded-in a car that was already upside down on the loan (meaning, you owed more than what it's worth), and financed the difference into a new car loan.

If on the other hand, you put a down payment of at least 20% on your vehicle, you probably won't need GAP insurance.

GAP insurance policies usually sell for between $300 and $700, and can be purchased through a dealer, or your current car insurance company.

If you do intend on getting it, make sure to shop around. Dealers have been known to markup the price of GAP insurance by 200%.