1) Your loan is longer than 60 months

2) You traded in a vehicle that had negative equity

3) You’re buying a car that traditionally loses value quickly such as a luxury

vehicle, domestic sedan or a vehicle that has a lot of options

4) You intend to drive a lot of miles in a short amount of time

5) Your loan has a high interest-rate or you’re putting  little or no down payment

According to a study published by Experian, approximately 85% of new car buyers will use some sort of financing to pay for their vehicle.  If you are buying a new vehicle from a dealer, you can expect that the dealership will likely try to sell you what is known as a Gap insurance policy. Gap insurance is a type of coverage that pays the difference between what you owe on the vehicle and the actual value of the vehicle if the vehicle is involved in a total loss accident.  Dealerships usually offer this for new cars but they often offer it for vehicles that are less than three years old. It is even offered on lease policies now. Dealerships offer this coverage to benefit their buyer and it is often a coverage that is not very expensive, usually ranging between $350 and $850 for a policy depending on the value of the vehicle.

The price varies depending on the length of the loan, the value of the vehicle and the amount of the car loan.

Gap insurance is a coverage that is beneficial to buyers because it protects them against factors that are out of their control. Most people know that new vehicles depreciate very quickly. Insurance companies determine the value of the vehicle not by what you owe on the vehicle but instead by what the fair market value is at the time of the loss.   I generally explain fair market value to clients as the amount you could’ve sold the vehicle for on the morning of the accident. This number is usually found by looking at car sale sites such as CarMax, Auto Trader, and Edmonds etc. There are many such sites. In order to determine the value of your vehicle insurance companies look at comparable sales much like real estate.

How Gap insurance works

There is nothing like the smell of a new car. Unfortunately, new vehicles depreciate significantly in the first few years of ownership. Often, clients come in and they do not understand why the insurance company is not offering them what they owe or more on the vehicle. Unless the buyer made a hefty down payment on a vehicle to start the auto loan, the chances are significant that most vehicles financed will be worth less than what is owed on the loan for the first several years.  In fact, when you purchase the vehicle,  many costs are included in the loan such as taxes, registration,  doc fees and other warrantees etc., which do not increase the vehicles value,  but which are owed on the loan.

For example let’s say you purchase a new vehicle for $25,000 after tax registration and other fees the finance cost on the vehicle is $27,500 even though you put several thousand dollars down.  The vehicle was $25,000 when purchased and it depreciates from the time you drive it off the lot. Let’s say you get into an accident six months later and value of the vehicle is now approximately $20,000. Because the vehicle was used, even though you purchased it for $25,000.00, there’s mileage on it now and it is not worth the same price as a new vehicle. However, your loan is still about $26,000.00 and the insurance company offers you $20,000 as a total loss. This is known as being “upside down” in the vehicle. Without Gap insurance, if your vehicle is totaled, your insurance company or the other side’s insurance company will pay you the fair market value, which is likely less than you owe on the vehicle.

This is why Gap insurance is important. One thing the dealership will not tell you and no one will tell you including the Gap company is that when you make a Gap claim, the Gap insurance company is extraordinarily difficult to deal with.

At the Law Offices of Laura Payne Hunt, we handle Gap insurance claims for clients. Many attorneys do not. On average, the Gap insurance company asks for 15 to 20 different contracts when administering the Gap plan. When you purchase a new or slightly used vehicle it is extraordinarily important that you keep every single piece of paper the dealership gives you in a file, and that you keep that file. In the event that you need to make a Gap claim, you will likely need almost everything in the file.

Unfortunately, with the cost of new vehicles, being upside down in a car loan is fairly common. Experience estimated that nearly 1/3 of people who traded in their vehicles last year were upside down in their new vehicle by more than $5000.

How do I know if I need Gap insurance?

If you are making a down payment of 25% or more on your next vehicle you may not need Gap insurance. Although you may want to hold your money and make that payment as you get into the loan. Because Gap insurance does not cover what you paid for down payment. For example let’s say you buy a new vehicle for $25,000 and you drive it off the lot and it has immediately depreciated $5000 and you put $5000 down on the vehicle.  Six months later you get into an accident which is not your fault and the vehicle is totaled.  The insurance company will pay you your fair market value which in your case would be the loan of $20,000.00. However, you will be out your down payment that you put on the vehicle and there is no recouping that money.  Therefore, it may be wise to put a minimal down payment and keep that money to pay the loan down two years out.   If you are taking a loan for longer than 60 months, you should purchase Gap insurance. It will be likely that you will wind up upside down in the vehicle.  Also, many people are upside down in their vehicle and want to get a new vehicle. Dealerships are quick to offer a large financing package to finance the amount you owe on your previous vehicle and put you in a new vehicle. This could have cut catastrophic consequences if you are in a total loss accident and do not have Gap insurance. You will then owe the difference between your new car depreciation and your prior cars upside down loan. This is a situation we would never recommend someone to be pushed into by the dealership. However, the Gap plan will not cover the prior loan so make sure the loan contract reflects the loan is for the new car only and not a past loan.

Some cars traditionally lose more value more quickly than other vehicles, such as high-end luxury cars and sedans. You will want to purchase Gap insurance if you are purchasing one of these types of vehicles or a vehicle with a high number of options on them; it is hard to recoup those costs.  In addition, if due to your past credit issues you are in a high interest loan or you can put little or no down payment on the vehicle you should definitely get Gap insurance

Where can I get Gap insurance?

Something a dealership will not tell you is that the dealership is not the only place that sells Gap insurance. Many auto insurance companies offer it independently and often credit unions offer Gap insurance on their auto loans. If you think that you need to get Gap insurance and you’re buying a new vehicle or a slightly used vehicle, call your credit union or your auto insurance provider and see how much these policies cost. You should be prepared when you go to the dealership.  It could save you hundreds of dollars if you are purchasing your Gap insurance through the credit union or through your own auto insurance policy.

When buying a new vehicle, you’re often bombarded with many choices in add-ons the dealership is trying to sell. The more knowledge that you have going in to make your purchase, the better choices you will make.   I will have blogs in the future about auto warranties and other add-ons when purchasing a vehicle Always remember that you have options to purchase vehicle warranties.  Gap insurance and other type of coverage the dealer may offer you for things like upholstery repair are available outside of the dealership. The dealership may be offering a good deal because they want to sell you the vehicle. However you should always know your options. The better informed consumer that you are, the better decision you will make.

If you or a loved one is involved in an accident involving the total loss of a vehicle, call our office immediately.  We will make sure you receive the most for your vehicle and if there is Gap coverage, we will handle that portion of the claim without cost to our client.  We can make sure that you receive the care you need and deserve, and advise on how to preserve evidence.  If you have been in any type of accident and have questions, please don’t hesitate to contact our offices today.  At my office, we are experienced in helping injured victims get the compensation they are entitled to.  Insurance companies never have the best interest of the injured person at the top of their priorities.  They want to pay as little on every claim as possible.  Having worked for an insurance company as an attorney for 9 years before opening my boutique law firm specializing in helping injured people, I reviewed thousands of auto accident claims and policy provisions.

At the Law Offices of Laura Payne Hunt, we are here to help you and your family in the event that accidents and tragedies occur. For any of your legal needs, do not hesitate to contact our offices.  The Law Offices of Laura Payne Hunt is a boutique, family owned law firm in Henderson that specializes in helping injured people and the community with legal issues involving auto accidents, wrongful deaths, slip and falls, truck accidents, injuries to children, bicycle accidents, dog bites, and all types of injury claims.  Please do not hesitate to call us anytime you have a legal question or you or a loved one has sustained an injury at 702-450-(HUNT) 4868 and text 24/7 at 702-600-0032.

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