The value assigned to your automobile after your car is totaled by an auto insurance company may be less than the amount you currently owe on your car loan or lease. Frequent buying and selling, leasing and low down payments can all cause you to be "upside down" on your car loan. Gap insurance, or guaranteed auto protection, provides coverage for the monetary discrepancy between what you owe on a vehicle and what your insurance company will cover if your car is no longer usable after a collision or weather damage. Avoid gap insurance through savvy auto purchasing decisions and alternative savings options.
Step 1
Purchase a car rather than opting for a lease. The amount of money you have invested in a leased vehicle is lower than in a purchased vehicle. While you pay less per month to lease a car, your payments are not applied to the principal value of the vehicle even though the actual cash value of the car is decreasing. Many rental agreements require gap insurance and the cost may be built into the monthly lease rate.
Step 2
Select a vehicle with low depreciation values. Not all vehicles lose value at the same rate. The depreciation rate is based on the resale market for used cars, the perceived reliability of the car brand and the popularity of the vehicle. While you cannot precisely predict the depreciation on a vehicle, you can choose popular car model and a brand that is rated high by consumer rating services.
Step 3
Put down a large deposit. Your outstanding balance on a vehicle decreases proportionately to the amount of money you pay when initially purchasing your vehicle. If you have limited funds, select a vehicle that costs less, use a trade-in or consider delaying your purchase until you have saved for a bigger deposit.
Step 4
Buy a used vehicle. Take advantage of the high initial depreciation on vehicles and purchase a used car. You benefit from a decreased initial cost and a lower rate of depreciation over the life of your vehicle, and your standard insurance should value your car close to the value of your car loan.
Step 5
Avoid frequently changing cars. When you trade in a recent model vehicle, you usually do not receive enough trade-in value to cover your outstanding car loan. You may be offered a loan that covers the difference between what you owed on your previous vehicle and the cost your new car. This higher loan increases your need for gap insurance because of the built-in discrepancy between the value of your car and your outstanding loan total.
Step 6
Create a savings fund. Instead of paying gap insurance, create your own emergency fund. Place money in a savings account to cover the difference between your car's loan and the car's value. Contact your car insurance company for an estimate to help you establish the amount of money you need. Instead of paying for gap insurance, you earn interest on your money that you can use towards the purchase of your next automobile.
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