Gap Insurance

 One form of insurance that auto dealers often attempt to sell to consumers is gap insurance. If a person is underwater on their loan (meaning they owe more than the car is currently worth) and the car is totaled, the borrower is liable for the difference. This means right after you total your car, the insurance payoff might not be enough for the loan! To prevent this, dealers offer gap insurance.

Only On Totaled Vehicles

This insurance only applies if the vehicle is totaled and the car is worth less than you owe. If you have a low term or brought a significant amount of money to the deal, it is rare for you to even need insurance. These products range in price depending on how underwater the loan is (some loans start at >200% LTV!) and are very expensive: often $750+.

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Many would argue that subprime borrowers need the assurance that totaling their car will not put them significantly behind. Considering there is very little legal recourse for a lender to come after small amounts of money (they often ignore small losses because the legal fees are so high), these are the exact people who can’t afford the extra $750 today.

My suggestion? Put more money down and ignore the gap insurance.