Do You Need Gap Insurance?

Thu, Dec 15, 2011

collections, credit, insurance

crappy cell phone pic of my wrecked car (2008)


A few weeks ago, I told the story of how I hit a deer and totaled my car in 2008. I know the above pic is horrible, but it’s basically my car lying on its top in a ditch. What I didn’t talk about in that post was the impact of the wreck on my finances.

I bought the HHR used in 2006, right in the middle of our bankruptcy. I know, that sounds ridiculous, doesn’t it? But I got a job exactly a week after our court date (my luck), and since we gave up one of our cars in the bankruptcy, I had no way to get to work. So my lawyer told me I was welcome to buy a car if I could find someone willing to provide financing.

The dealership where I bought the HHR was happy to provide financing - at 18% interest. Which should be against the law but isn’t. I paid $16,000 for the car, scheduling 6 years of $400 payments. If I hadn’t totaled it, I would have made 72 payments totaling nearly $29,000. STUPID!

The Aftermath of the Wreck

At the time of my wreck, the car was worth $9500 and I still owed around $12,000. Progressive gave me the full value of the car, which was sent to the finance company, leaving me with a $2500 balance. I was so upset!

I actually continued making my car payments for 2 months while driving my dad’s truck to work. But when I bought another car, there was no way I could afford to pay both. So I called the finance company, explained the situation, and asked to refinance the $2000 or so I had left. “Sorry,” the girl told me. “We don’t do refinancing. You’ll have to get a loan elsewhere to pay this off.”

Um, excuse me? My bankruptcy just discharged and you think someone is going to give me a loan with no collateral? I was only able to finance my replacement car by the skin of my teeth!

I was completely willing to pay the remainder of my loan, but not on the current terms. Yet the finance company would accept nothing but the full $400 payment each month. So I did what any broke person would do - I stopped paying them and stopped answering their calls. (Yes, we were broke even after bankruptcy.)

Fast Forward

Here I am, 3 years later, with a charge-off on my credit report. The ONLY negative on my report other than the bankruptcy itself. I pray that my current car lasts forever because I doubt I could finance another one - a charge-off from a car loan pretty much kills any chance of that.

As soon as I insured my current car, I asked Progressive about gap insurance. Gap insurance will pay off your vehicle when you owe more than it’s worth (with restrictions). My coverage will pay 25% more than the value of the car. So if I wreck it tomorrow and it’s worth $10,000, my policy will pay up to $12,500. (Luckily I owe less than the car is worth, so I don’t have to worry about it. Yet I keep the coverage in case my car suddenly plummets in value.)

Some people will say that gap insurance is a waste of money. If you put a large enough down payment on a car, you’ll always owe less than it’s worth. You shouldn’t finance a car. You should only finance for 2 years. Blah blah blah. That’s great, but it’s not realistic for most people. And it’s not realistic for me, even right now.

The Bottom Line

I can’t afford to pay for two cars. If I wreck mine, I’ll have to finance another one. And I can’t pay another car payment on top of the one I’ve got now. I also can’t afford another negative entry on my credit report. So I pay the $60 a year or so to know that my car loan will be paid in full if I have another accident.

No one wakes up in the morning thinking, Oh, I’m going to have a wreck later today! We always hope it won’t happen to us, but you need to be prepared in case it does. If you financed all (or a large part) of your vehicle, chances are you owe more than it’s worth. What will you do if a stupid deer runs out in front of you, like in my situation?

For me, gap insurance is a miracle product. It’s worth the tiny added cost on my car insurance bill. Everyone won’t need that kind of coverage, but if you do, I urge you to talk to your insurance company.

31 Responses to “Do You Need Gap Insurance?”

  1. Tanner E says:

    Very good info, and rather scary at the same time. My father got ripped off with the last car they bought (the same dealership fired that salesman and when we went in to talk to them, they couldnt believe what a bad deal we had been stuck with!), so we owe a LOT more than the car is worth. We're within the last $6k stretch, but my father doesn't want to get gap insurance. With our luck, at least it will not get totalled until after it is paid off…

    • I always said I'd probably total mine the day after it was paid off. Honestly, though, that would have been a lot less damaging than what ended up happening! I'll cross my fingers that you guys make it through that last $6k with no issues.

  2. Mdoats says:

    Point 1, you are wasting 60/year since you don't need gap insurance - if you totalled your car today normal insurance will cover the rest of your loan.  So, money down the drain. Point 2, nobody needs gap insurance if they have a proper emergency fund which is meant to cover, you know , emergencies like wrecking you car.  You would have a proper emergency fund if you didn't continually rationalize to yourself purchases like a new video game console and a $300 backup drive.  Sure, Apple products are great, but given that you can get a perfectly functional backup drive for less than $100, the extra $200 you spent was pure rationalization.  And on something that loses value even faster than your son's toys. I don't think you have put your free spending days as far behind you as you think.

    • Wow, thanks for sharing your very spirited opinion! You must be a visitor from MSN Money. As I stated, the value of my car could drop at any time, so I prefer to know I'm covered. And as far as what I buy, I'm not sure I have to justify my purchases since I don't recall asking you to pay for them. I have no credit card debt, my bills are paid on time each month, and I have an emergency fund - why is it any business of yours how I spend my money?

      • Mdoats says:

        Well, you *do* have a blog talking about how you spend your money, with open comments, and you do need Web traffic to support yourself now that you are no longer working, so you kind of are making it my business to comment aren't you? 

        How is the value of your car going to drop at any time? And, if for some reason the value of your car did plummet, so would the value of your gap insurance.  Using your example, you pay $60 for $2,500 of coverage.  But if your car's value was to drop to say 1,000, you would be paying $60 for $250 coverage.  Not a very good deal. 
        You are pretty defensive about these purchases.  You spend a lot of time in your posts about them justifying your purchases to yourself (I really need it, I waited, etc etc.).  I merely point out that there is no justification other than that you want them.  If you had said, "I want what I want and I'm going to get the things I want despite my parlous financial situation" I really would have had nothing to say would I?  

        • I just dislike the attitude of "you have no right to buy things" from someone who is not even a regular reader of my site. My objective is not to become a monk and live off rice and water. I put a lot of miles on my car - the value it has now is not going to hold forever. And if I waste $60 a year and never wreck that car, who the hell cares? It's five bucks a month.
          I'm not sure who decides what people are and aren't allowed to own. But I would rather buy my son a video game system for $120 out of my pocket - a damn Christmas gift, no less - than pay it toward credit card debt. There's a difference between justifying a purchase and explaining to my readers that my decision was not made in the same manner I would have made it 2 years ago. Any purchase requires a certain amount of justification or prioritization.
          Please, point me to your corner of the web where you put yourself out there to try to help people. Oh, what's that? You prefer to tear people down instead? Well that's your right. But it's also my right to call you an asshole.

        • And by the way, I definitely don't need your visits OR comments to make a living. So feel free to go judge someone else.

        • Melissa says:

          OK, do I just not understand gap insurance, or do you just not understand the concept of math? If she owes $12,000 on a car worth $9,500, then the gap insurance will cover the rest if she totals the car, thus the gap insurance is worth $2,500. If the value of the car suddenly drops to $7,500, then the gap insurance actually increases in value, since it will now cover her for up to $4,500. And presumably, once she owes less on the car than it's worth, she can drop the extra insurance. Isn't that how it works?

          Regardless, you're quibbling over $60 a year? I wouldnt care if she spent $60 a year on magic beans if it helped her sleep better a night.

  3. Money Beagle says:

    We have our cars 100% paid off so thankfully this isn't something we need to worry about. I do often wonder what we would actually receive in the event our car was totaled.  I use the Kelley Blue Book estimates less 5% as my calculation in the 'net worth' monthly tracking that I do.

    • When we filed for bankruptcy, our attorney used the NADA guide - he said no one uses KBB. Sure enough, Progressive used the same NADA printout I did to estimate the value of my car. So that's what I'd recommend!

  4. Cash Flow Mantra says:

    It is good to know that there are insurance products available for those who need or want them.  Right now with many kids to care for, I carry a lot of life insurance.  One day when they are all on their own, I shouldn't need as much so will adjust accordingly.  It sounds like gap insurance is a good fit for you.

  5. 20sFinances says:

    Dang - that's hard to argue with… I hope it's not too much more expensive?

  6. Newlyweds on a Budge says:

    I've never even considered gap insurance. i've heard about it briefly. i think it's great for your situation. and i completely agree with you that paying off a car in full or only financing for two years is unrealistic for most people.

  7. Deena Dollars says:

    Thank you, as always, for keeping it real for those of us who are not financial superstars like most of the PF world. I had never heard of gap insurance, but would totally be looking into it if I were not getting rid of my car in the next month or so! (Cross your fingers for me that it sells…)

  8. Aloysa says:

    I totally agree with you! I'd rather spent $60 a year ($5 per month… we spent more on coffee!) and have a peace of mind! My peace of mind is worth more than $5! :-) You got one mean troll here! :-) I had one too on my blog a while ago. There are people like this one… sermonizing and judging…. I am glad you didn't delete his/hers comment and let us read your responses. Well done!

  9. Anonymous says:

    This seems worth it, especially since you've already been in a situation where it would've proved helpful. Plus, people are always "should-ing" other people. As you've mentioned, according to some PF bloggers, you shouldn't even own a car but this is just completely ludicrous for 90% of the country. God, I really hate the should-ers.

    • I totally agree. It must be nice to live in a universe where you're prepared for everything and never do anything stupid with money. I wouldn't know since I've never lived in that world! It does no good to dwell on what you should have done, unless you own a time machine (in which case I could use it if you're loaning it out).

  10. Catseye says:

    I've heard of gap insurance, just didn't know much about it.  It sounds like a good idea and at only $60 a year, that's affordable peace of mind.  I sure can't argue with your reasoning!
    Also, thanks for the NADA tip.

  11. World of Finance says:

    I'm glad that you are okay after the accident. Your story makes a valid point that it is a good idea to have gap insurance in certain instances.

  12. Jeffrey Trull says:

    I'm all for cheap insurance coverage that can prevent big expenses and headaches later. I think renters' insurance falls into somewhat of the same category as gap insurance does. They both worth paying just a little more for peace of mind.

    • I agree completely. In years of renting, I never filed a claim on my renters' policy, but I was glad I had it. Right now I have it again since I rent from my parents. Their policy does NOT cover the contents of the house - I think there's a $5k payout to replace the appliances. But that does nothing for all my stuff if something goes wrong.

  13. Patti says:

    WOW! I am amazed at the attitude some people have towards you. That 'troll' probably hasn't read much of your blog and obviously doesn't understand that you're not blogging about how to be a tightwad, you're blogging about how you have turned your life around from extreme debt and bankruptcy to a more financially stable life.

    I bet he was also one of those morons that thought the value of their home would never drop unexpectedly, then the hell storm came in and put his house at 50% of what it was valued 5 years ago lol. If you only drive 5 miles a day you can reasonably assume that the value of your car will not drop significantly over time, but I AM a regulat reader and I KNOW you drive far more than that and the value of your car drops fast with the amount of miles you rack up in a year. I am a long distance driver as well and have added 12,500 miles on my car in a short 6mo,  I am grateful you have talked about gap insurance because I have never heard of it and I am paying on a brand new car. You can bet I am calling my insurance company first thing Monday morning! Thank you Andrea :)

    • People are always entitled to their opinions here - I just wish they could express them without being so rude! I didn't realize I was supposed to take vows of poverty to blog about getting out of debt!

      In your situation, I would definitely check on gap insurance. It's not very expensive and it gives you a little peace of mind in case something happens. I'll probably always keep it on any car I own until it's paid off. And really, I may keep it after that - if they're going to give me 25% more, why wouldn't I? Glad you found something worth reading; thanks for your comment!


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