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I wrote yesterday that I picked up my new Toyota Tundra this past weekend and I thought it would be a good idea to write about my experience at the dealership….wheeling and dealing. There really wasn’t much wheeling and dealing since Toyota was having their year end clearance and offering incentives to get rid of their vehicles. I essentially got a $3000 rebate and another $3000 knocked off the invoice price.

The salesman did have his typical play book asking whether I was trading a vehicle in, financing, etc but I quickly put a stop to it saying I just wanted to buy today.

The finance person did his best to sell me extended warranty plan, extra services and gap insurance. I want to focus on the last item, gap insurance, though as it struck me odd that the finance guy was shocked that I would turn down gap insurance. He asked me repeatedly if I knew what gap insurance was and how it worked and if I was sure that I didn’t want it. He simply couldn’t believe that I didn’t want gap insurance. I experienced this issue when we bought our last new car as well, the finance person there was shocked that I turned down gap insurance.

What is gap insurance? Well, if you buy (finance) a vehicle for say $40,000 and get in a wreck two days later where your car is completely destroyed, gap insurance pays the difference of what the insurance company says your car is worth vs. what you owe. So if the insurance company says your totaled car is worth $38,000 and you still owe $40,000 then you have a negative loss of $2000 -that’s the “gap” that insurance covers.

But wait a minute, let’s do the math. If you pay $300 for gap insurance policy and it only covers $2000 outstanding on a loan then you’re essentially paying 15% interest on this “loan” and that’s really high interest rate to be paying! So unless your auto loan is at a rate way above 15% then it’s crazy to buy this policy.

You can crunch the numbers on your specific situation but one of the other key reasons for not buying this policy is because I don’t plan on having long term financing anyway on my cars. I’ll pay them off in a few months after they’ve sat on my credit report for a few months so they can reflect “an excellent payment history” and improve my FICO score.

So I saved $600 by NOT buying gap insurance since it’s a big waste of money in my view.