Should You Get Gap Coverage to Protect Your New Car Loan?

If you're shopping for your first new car, chances are your trade (if you have one) isn't worth much, or maybe you're even upside down on it. Perhaps you don't have a down payment or are thinking of taking five years instead of the usual four to pay for your new car. If any of these scenarios sound like you, you really should consider getting gap protection.

The principle behind gap protection is that the moment you drive your brand new car off the lot, it instantly becomes "used" and begins to depreciate, thus creating a gap between the price you financed it for and its present value. Gap protection is designed to fill in that gap, so if you drive it off the lot and get into a head-on collision, you won't have to keep making payments on a car you can no longer drive.

The fact is, if you cannot put at least a 20 percent cash down payment on your new car, you're going to need gap protection. On top of this, used car values have plummeted due to so many people recently trading in their old vehicles for something new and shiny, which brought about more used cars for sale than people buying them. So if you have a free and clear vehicle to trade, it may be better just to sell it yourself.

But Won't My Auto Insurance Cover It?

Afraid not. When you buy a new car, you should buy a policy that provides full insurance coverage on it. However, the insurance company is only required to pay the present value of the vehicle (i.e., depreciation is factored into the equation). You can take a look at the Kelley Blue Book to get an idea of how much a vehicle bought last year would be worth today.

The most basic gap coverage pays the difference between your insurance company's settlement payment and what you still owe for the vehicle. Other types are available that will repay you for the insurance deductible, provide $1,000 towards a new car, or will even replace the vehicle regardless of whether the price has gone up.

It's possible that your lender may automatically include the coverage for its own protection, but you really should make sure it's there if you decide that you want it. You could also check with your auto insurance company to see if they offer gap coverage. Make sure the gap coverage you've chosen covers all types of total loss, including accidents, theft, and natural disasters. As with many things, it is better to have the coverage and not need it than to need it and not have it.

Do I Have to Get Dealer Financing to Get Gap Coverage?

Absolutely not! In fact, you could pay twice as much for gap coverage if you finance through the dealer. So do your homework, weigh your options, and check online to get the financing you need for your new car.