Let me tell you a story about my friend and her car. We’ll call her Glinda. Glinda bought a shiny new red sedan. She spent a lot of time researching cars and going for test drives before she settled on the perfect make and model. She got all the features she wanted and was in love with her new ride from the day she drove it off the lot.
Glinda takes good care of her new car, keeping up with all the recommended maintenance. She’s a careful driver, has excellent car insurance, and lives in a safe, quiet neighborhood. She usually parks in the driveway, but on one sunny summer day, she parks on the street because her daughter is moving out and has her own car in and out of the driveway all day long.
The next morning, Glinda glances out the front window on her way to the kitchen for her morning coffee. She does a double-take. Her beautiful new car is on the street, smashed. Shocked and upset, but ever responsible, Glinda calls her insurance company to report the hit and run. She’s sick about the car, but cars, after all, can be replaced and no one was hurt. Glinda likes to look at the positive side.
A few days later, her insurance company tells her a check is coming for the ACV, or actual cash value of her car. When the check arrives, Glinda does a double-take again when she sees the amount the check is for. Glinda quickly opens her car loan details online and looks back and forth between the amount she owes on her destroyed car and the amount written on the check from her insurance company. The insurance payout is over $2,000 less than what she owes.
What is the Gap?
What happened? Why doesn’t Glinda’s insurance payout cover what she owes? Well, unfortunately, it’s not uncommon to have a gap between what you owe on a vehicle loan and what that vehicle is worth. It’s all because of depreciation. The car is worth what you borrow when you buy it, but cars lose value quickly. You could be thousands of dollars “underwater” (meaning you owe more than the ACV) just one year into your loan. Auto loans with longer terms are especially vulnerable to a gap because the principal is being paid down more slowly than a shorter-term loan.
Who Pays the Difference?
This is the really bad news. Glinda’s check from the insurance company went fully toward her loan, and she STILL has to pay two grand and change out of pocket to pay off the rest of her loan right away. Because the vehicle was totaled, the full amount of the loan is due immediately.
And, more bad news, Glinda still needs a car. She goes shopping again, but doesn’t have any equity from a trade-in, and has to come up with a down payment out of pocket. Thanks to all this unexpected expense, she has to settle for a much more modest car than the original, without all the features she wanted.
How Does GAP Insurance Help?
Here’s how the story would have been different if Glinda had GAP Plus Insurance1 from GOLD:
Glinda’s insurance company sends her a check for the ACV, which is frighteningly lower than what she owes. Her GAP Insurance plan steps in to fill the gap and send a check for the difference to finish paying off the loan. Glinda doesn’t owe anything out of pocket.
Oh but wait, there’s more. Glinda still needs a car. She goes shopping again. She doesn’t have any equity from a trade-in, but what she does have is a $1,000 reimbursement to go toward the down payment of her new vehicle financed with GOLD. She finds another car that has everything she loved about the first one. It’s blue, not red, but her husband says the blue really brings out her eyes. She loves it. Glinda and her new car live happily ever after.
Do You Need GAP Insurance?
Yes, almost certainly. Unless you buy your car with cash (don’t have a loan) or have a loan with a very short term, chances are good that at some point during your loan you’ll owe more than insurance would pay if the vehicle was totaled. You should also know that the gap isn’t limited to cars, but you can purchase GAP insurance for motorcycles and RVs, too.
Where can you get GAP insurance? Right here, of course. GAP insurance is an optional add-on to GOLD Vehicle Loans. I’d never buy a car without GAP Insurance, and Glinda never will again either. Next time you finance a vehicle, make sure you’re protected from the gap.
1Your purchase of MEMBER’S CHOICETM Guaranteed Asset Protection (GAP) is optional and will not affect your application for credit or the terms of any credit agreement you have. Certain fees, eligibility requirements, conditions, and exclusions may apply. If you choose GAP, adding the GAP fee to your loan amount will increase the cost of GAP. You may cancel at any time. If you cancel GAP within 90 days you will receive a full refund of any fee paid. See Credit Union for details. Federally insured by NCUA.
About Janet Weinhofer
Jan is the VP of Lending at GOLD. She directs and coordinates all lending activities within the credit union, ensuring compliance with lending policies. She ensures her team provides friendly, professional, timely, and personal service to all our Members. Jan is proud to be part of GOLD’s mission to empower our Members to achieve personal financial success.
Automotive - May 26, 2020
Extended Warranties: Yes or No?
When does purchasing an extended warranty make sense? Are they ever worth it? In some situations, yes.