Alex's Thought of the Day: Gap Insurance is Dumb

When you buy Gap insurance, you're betting that you will total your car. An absolute "best case" scenario for this bet has you doing a terrible job negotiating the price of the car and then totalling it (but not dying, because if you die, who cares what you owe?) before you send in the first check. Every cent you pay on the car reduces the amount you win if you total it.

Let's walk through some hypothetical numbers. Let's say you have a $25k car that depreciates 20% as you drive it off the lot, 30% after one year, and then 10% (of the original value) each subsequent year. To keep the math easy, I'm assuming that there are two interest free loans available- a 5 year and a 6 year. I'm also assuming that you put $0 down on the car, and negotiate away the cost of taxes. I'm assuming the cost of GAP insurance here is $500

I'm making a lot of assumptions here, and dumbing down the math a little, but the shape of these numbers is pretty self-explanatory. If you think that you're better than, say, 5-1 to NOT total your car in the first couple years, you shouldn't buy GAP insurance.