In Focus – SCCCU Blog

Many people get excited after they buy a new car. They love playing with the new features and enjoy the ride. However, amid all the fun and excitement, it’s crucial to consider the financial aspects of your purchase, including what insurance is best for your new car. Of course, you need the standard auto insurance policy, but what else should you consider?

What is GAP Insurance?
GAP insurance covers the difference between the actual cash value of your car and the amount you still owe on your auto loan if your car is totaled or stolen. Here’s how it works:

When you buy a car, its value depreciates when you drive it off the lot. In the unfortunate event that your car is totaled in an accident or stolen shortly after purchase, your standard auto insurance will only cover the market value of the vehicle at the time of the incident. This amount can be significantly less than what you initially paid for the car and less than what you owe on your loan.

For example, if you purchase a car for $30,000 and it’s totaled a year later, the market value might have dropped to $20,000. If you still owe $25,000 on your loan, your standard insurance will cover the $20,000, but you would be left paying the remaining $5,000 out of pocket. This is where GAP insurance comes in; it covers that $5,000 difference, saving you from a potentially significant financial burden.

Typically, you can buy GAP insurance through a dealer or through the financial institution financing your car. For example, SCCCU offers GAP insurance on auto loans, which we can just add to the cost of your loan (and it's not expensive).

When GAP Insurance is a Good Idea

• High Loan-to-Value Ratio: If you made a small down payment or none at all, you likely have a high loan-to-value ratio, meaning you owe significantly more on the car than its current market value. In such cases, GAP insurance can be particularly beneficial.
• Rapid Depreciation: Some vehicles depreciate faster than others. Luxury cars and certain new models can lose value quickly, making GAP insurance a smart choice to protect against rapid depreciation.
• Long Loan Terms: If you’ve financed your car with a long-term loan (60 months or more), the vehicle’s value is more likely to fall below the loan balance during the term. GAP insurance can cover this difference.
• Negative Equity: If you rolled over an old car loan into your new loan, meaning you owe more than the car is worth, GAP insurance can protect you from this negative equity.

When GAP Insurance Might Not Be Necessary

• Large Down Payment: If you made a substantial down payment (20% or more), your loan balance will be closer to the car’s actual value, reducing the need for GAP insurance.
• Short Loan Term: If you have a shorter loan term (36 months or less), the risk of your loan balance exceeding the car’s value is lower, making GAP insurance less critical.
• Paying Off the Loan Quickly: If you plan to pay off your loan quickly, the time period during which you’d need GAP insurance is shorter.
• Already Covered: Some auto policies include new car replacement coverage, which can cover the cost of a new car if yours is totaled within the first year. This might make GAP insurance redundant.

GAP insurance can be a valuable addition to your auto insurance policy, providing peace of mind and financial protection if your car is totaled or stolen. Carefully assess your financial situation and the specifics of your auto loan to determine if GAP insurance is a worthwhile investment for you. By doing so, you can ensure that you’re adequately protected without paying for unnecessary coverage.

To learn more about the GAP insurance offered at SCCCU, talk to one of our loan officers at 831-425-7708.