Should you purchase gap insurance when you purchase a car when you already have auto insurance, or is this another auto dealer rip-off?

The bitter truth is: Unless a vehicle is in the last few months of its finance contract when totaled, chances are the insurance company payoff — based on the current market value of the vehicle when totaled — will be less than the remaining finance contract balance. Who is responsible for the remaining unpaid balance? Sadly, it’s the vehicle owner.

Is this some scam the insurance companies have concocted in recent years to keep more of your money? Years ago it was normal that an insurance company would pay off the entire outstanding balance if a car was wrecked or stolen. But that’s no longer the case.

Back then, buyers were required to put 20 percent down on the purchase of a new vehicle with either cash or a trade-in. The terms of the contract were for 24 months or 36 months. Typically, if the car was totaled pulling off the dealer lot, the 20 percent paid upfront represented sufficient equity to cover what the insurance payout didn’t and the finance contract was satisfied.

But more recently low or no down payments and financing that can stretch for five years or more have created a situation in which many owners are driving a vehicle that, because of depreciation, is worth less than what’s owed on it — or being “upside down.”

Buyers have three choices to avoid this situation: Make a larger down payment or finance for shorter periods of time, make a 20 percent or more down payment or buy gap insurance.

As with extended warranties and other products sold in the finance offices of car dealerships, you may be able to find gap insurance at more affordable rates on your own. Your insurance agent can help or use your search engine and key in “gap auto insurance.”

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