If you are ever going to buy a new car again and finance the purchase, you have a GAP to think about as you drive off the lot. Everyone knows what happens when you buy a new car; by the time you get it home Already It’s worth 25% less. After about 18 months it has lost about 50% of its value, but how much do you still owe? If you owe more than your new car is worth, that’s your GAP. If you hit that because you could face a large sum of money to cover the GAP that your insurance policy does not pay.

Is that how it works: If you crash and your vehicle is a total loss, your insurance company will pay you what the car is WORTH, which may be very different from what it SHOULD.

Example: Joe trades in his 2005 Dodge for a 2010 Chevy. He still owes a little more on his Dodge than it’s worth, so the dealer adds the difference ($1,000) to the purchase price of the new loan. Joe’s new car is going to cost him $25,000 + $1,000 from the Dodge, for a total of $26,000 + tax = $27,976. Joe pays $2,500 for his down payment, leaving him with a balance of $25,476 to pay for the car. Twelve months later, Joe owes $21,655 when he has an accident and completely destroys his beloved Chevy. The insurance company does its job and writes Joe (the finance company, actually, since they still have the title) a check for every penny the car is worth – $14,500 – deductible ($500) = $14,000.

Who is responsible for the difference of more than $7,000? You guessed it, Joe is.

The example above happens every day. The insurance company has done its job and has paid everything it should pay: what the car is worth. Unfortunately, YOU have to pay more than it is worth. YOU are obligated to pay what you owe!

How GAP insurance works: If you could imagine yourself in Joe’s situation, you need GAP insurance. As his name implies, he insures against any GAP he may have between the value of his car and what he owes. So in the example above, Joe’s insurance company would have paid Joe the amount the car was worth PLUS the additional $7,000+ he still owed. There are two places he can buy GAP insurance, through the dealer who sells him his new car or through his insurance agent. BUT, one of the two will cost you 300% more!

Through the dealer: One of the biggest sales at the dealership is GAP insurance. They charge a fortune for it (usually around $400) and then add it to their financing. Financing $400 over 5 years at 5.5% ends up costing you $470. That’s not bad compared to paying the extra $7000 Joe had to pay, BUT it’s a lot more than he has to pay. Instead of getting your GAP insurance through the dealership, get it from your local professional insurance agent for a fraction of the cost.

Through your insurance company: GAP insurance can be added directly to your auto insurance policy for around $12 for 6 months. It’s the same coverage and protection, but the total cost over 5 years is $120. That’s a savings of $350 just for where you bought your GAP insurance. Make sure your insurance company knows if you’re buying or leasing, as that may affect GAP protection.

As long as you can save $350 AND get the same protection, you’ve made a wise financial decision. Make sure you buy GAP insurance if you need it, but DO NOT buy it at dealerships or you’ll pay too much!