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Question:


What is GAP insurance? Are you a fan of it? The car salesman was really pushing for me to purchase it, so I’m leery.
-VroomVroom90210


Answer:


If a pushy car salesman wants you to buy something, chances are you don’t want or need it. That’s the case with GAP insurance. GAP stands for “Guaranteed Asset Protection.” A policy pays out if your car is totaled or stolen and you owe more on the loan you took out to buy it than the car is worth when the loss occurs. Say you owe $25,000 on your loan and your car is worth $18,000 when it rolls off a cliff or is driven away by a thief in the night. If you have GAP insurance, it will cover the $7,000 difference.

I’m not a car person, and there’s plenty that I don’t know about insurance, but this type of policy sounds awful. First of all, what are the chances that something will happen to make your car a total loss, and if your car does meet its demise, what are the chances that its value will be sufficiently less than what you owe on it to make insuring against such an event worthwhile? Would having to pay a few grand – your maximum liability – really affect your lifestyle? Would you sleep better at night knowing that you have an infinitesimal chance of being spared that experience one day? GAP insurance sounds even less useful than insurance against asteroid damage. The question you should be asking yourself is not whether to by GAP insurance but whether to buy a car that you can only afford by taking out a loan so big that you run a meaningful risk of being underwater on it?

-Conrad de Aenlle



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