You don't need to consider gap protection if, during your loan term or lease, you will not owe more than your car is worth. To determine whether or not you are likely to be upside down and for how long, research the expected depreciation rate for your car. Kelley Blue Book online, at www.kbb.com, will tell you how much last year's model is worth today.
Then, using an online auto loan calculator, such as the Monthly Auto Loan Payment Calculator at www.Bankrate.com, calculate at what rate you will build equity in your vehicle. Fill in your loan information, and then click "Show/Re-calculate Amortization Table" to view a schedule showing your outstanding loan balance at any point during the loan term.
Use the two tools together to determine your equity (or lack thereof) at various points during the loan term.
Before you buy gap protection, make sure you're not already covered. It's common for leasing companies to include the coverage in the lease agreement for their own protection. And some auto insurance policies include gap protection as part of their standard coverage.
Gap coverage is available in most, but not all, states. Most often, car buyers purchase gap coverage through the lender financing their purchase, though insurance companies and online vendors offer it, too.
Gap protection from dealers and vendors. If purchased through any source other than your insurance company, the cost of gap coverage is typically a one-time charge in the hundreds of dollars.
Gap protection from your insurance company. However, if you buy gap coverage from your auto insurance company, it will most likely be billed as a small addition to your regular premium. Because it's not a one-time charge, you will continue paying for the coverage each time you pay your premium, until you cancel it. So, don't forget to calculate, now and then, whether you've closed the gap and can forego the additional expense. (For more information about auto insurance, see Nolo's article Buying Car Insurance.)
Shop around. Though it may appear that all gap protection is the same, some products offer more than others. For example, some types of coverage reimburse your insurance deductible, and some offer vehicle replacement, even if the price of the car has increased. Because of the differences, you can't shop by price alone.
Here are other things to look out for when shopping for gap protection:
To learn more money-saving ideas for your family, get The Busy Family's Guide to Money, by Sandra Block, Kathy Chu, and John Waggoner (Nolo/USA Today).
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