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That's a good idea, because you can afford more car by doing this.
But, if you have an accident and your car is totaled before your loan is paid off, you might have a problem.
Auto insurance companies will pay the book value of the car at the time of the accident.
If you buy a brand new car for $25,000.
00, you put down $1000 and drive it off the new car lot, within a few weeks, the book value will loose 25-30% of its' value.
If you have an accident 2 months into owning the car, you have $1000 plus 2 monthly payments of the car in equity.
(most of the two monthly payments is for interest) You will probably have $1200 in equity in your car.
The blue book value of your car has gone down to $19,000.
The insurance company will pay $19,000.
00 for the lost car.
You still owe $25,000 - 1200 = $23,800 on your car loan.
This means that although you had full coverage on your new car, you are in the hole for $4,800.
00 plus your deductible.
You should have gotten auto gap insurance when you bought the new car, and you would owe nothing if your car is totaled in an accident.
Gap insurance is usually pretty cheap so it is worth getting if you are going to finance your new car over a long period of time.
Many people are startled that they owe money after thinking that they had full coverage on their auto insurance.
So the answer to the question is yes auto gap insurance is necessary, especially in the above situation.
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