If you need gap insurance, you're likely overspending

DEAR BRUCE: I am told I can protect myself from being "upside down" by purchasing gap insurance. What is it, and is it a good idea? — H.T., via e-mail

DEAR H.T.: Gap insurance is an acknowledgment by the automobile industry that it has been overselling for years, which can lead to the buyer being "upside down" — i.e., owing more than the car is worth. For example, someone buys a car and totals it after six months. The other guy's insurance will pay what the car is worth, not what is owed on it. That's all the other guy's insurance company is obligated to pay. The difference can be substantial. If you owe $10,000 on your car and it's only worth $6,000, what are you going to do? You will have to come up with $4,000. Gap insurance pays the difference. The insurance can run from $400 to $700, and it can be an extremely profitable enterprise for the dealer. If it's absolutely essential, gap insurance may be worthwhile. The reality is that if you require gap insurance, you are buying something you can't afford.

Send questions to: Smart Money, P.O. Box 2095, Elfers, FL 34680. E-mail to: bruce@brucewilliams.com.

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