Car loans are often used when purchasing a new car. Unfortunately, as soon as the new car is driven off the car lot it depreciates markedly. Also, in the early stages of a loan you pay more interest than principal. In the early years after a new car purchase, then, the fair market value of the car is less than the principal owed on the loan. This is a disaster if that car is then wrecked and “totaled” by an insurance company.

Several of my former clients have been faced with the following situation: their wrecked car was totaled by an insurance company for a fair market value of, let’s say, $10,000. However, they owed $20,000 on their car loan. The result was: my client had a debt of $10,000 with their finance company, no car and no means to buy a replacement. “GAP” insurance would have prevented this outcome.

GAP (guaranteed asset protection) coverage protects the car buyer from the difference between the totaled value of a car and the amount owed on a car loan. In the example noted above, instead of my client owing $10,000 on an outstanding loan, this is paid by the GAP insurance.

Banks, credit unions, auto dealers or your auto insurance company often sell GAP insurance. The cost varies but one place we checked charged $500 for GAP insurance as a one-time payment for the life of the car loan. Suggestion: If you borrow money to purchase a new vehicle include GAP insurance as part of your purchase price.