Never Purchase Gap Insurance

A few weeks ago, we explained the purpose of Gap Insurance and a possible bad faith legal claim you might have against the Gap Insurance company if it refuses to pay on your claim.  See that post HERE.

If you happen to find this post before you bought the Gap Insurance, then here is why Gap Insurance is most likely a waste of your time and money.

When you finance a vehicle, you end up paying more than you would for that vehicle than if you paid cash.  Let’s illustrate this.  Assume you are buying a car for $10,000.00.  If you pay cash, the cost will be $10,000.00, plus whatever government taxes might be added, like your typical 6% tax in Pennsylvania.  If you finance the vehicle, i.e. take a loan from a bank, then you agree to pay a number of other fees and charges, like finance charges, interest, potential late payment fees, etc. over a period of years.  A typical vehicle loan might be for 5 years.  So, at the end of 5 years, you might actually pay $12,000.00 for the vehicle.

Assuming you financed the vehicle, let’s look at some different terminology involved in your loan:

OUTSTANDING BALANCE:  This is the amount left to be paid of the original loan.  Also known as the principle balance.  For example, if you took out a loan for $10,000.00 and made monthly payments of say $200 for 4 months, your outstanding balance is $9,200.00.  The outstanding balance does not take taxes, interest, fees, and charges into consideration.

PAYOFF BALANCE:  This is the amount you owe to pay off the loan completely.  This amount does include taxes, interest, fees, and charges.  So, you take out a loan for $10,000.00, you make 4 payments of $200.00, but you will owe more than $9,200.00 to pay off the loan because of added taxes, interest, fees, and charges.

Understanding the difference in the two balances, this is where we see the scam of Gap Insurance.  In it’s most basic form, Gap Insurance is designed to pay off your loan once your primary collision insurance company has exhausted its policy.  For example, you get in an accident and total the vehicle.  At that time, your PAYOFF is $5,000.00 on your auto loan.  Your primary insurance company pays $3,000.00 toward that loan.  Gap Insurance is designed to pay the rest of the loan.  However, deep within your Gap Insurance policy, it likely says that your Gap Insurance company only agrees to pay a portion of your OUTSTANDING BALANCE.  In other words, Gap Insurance won’t cover the full PAYOFF amount.  Therefore, you will still owe money and have no legal recourse against the Gap Insurance for bad faith.

Insurance is great to cover you in a time of need.  However, you have to fully understand what you are agreeing to when you purchase an insurance policy.  We know that Insurance Policies are really big and hard to understand.  Trust us, we don’t like having to read them either.  However, you have to review it before you buy it.  You have to know what questions to ask the person selling the policy.  That is the purpose of this blog post.  Ask the car dealer whether the Gap Insurance covers the PAYOFF or only the OUTSTANDING BALANCE.  We are willing to bet the car dealership will either say OUTSTANDING only or he will lie to you.

In the end, you don’t want to end up like our recent potential client.  Her outstanding balance was around $9,000.00 when her ex-husband totaled her car.  Her payoff was over $11,000.00 because he was supposed to make her monthly payments and missed a few.  Her gap insurance only covered a portion of her outstanding balance.  It left her owing over $2,500.00 on a totaled vehicle.  Not good.

If you have an issue with a Gap Insurance policy, give us a call.

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