Gap insurance typically comes bundled into your loan payments through your auto insurer or dealership and then discontinued when enough loan payments have been made to match up with the car’s value. Once that point arrives, however, gap insurance can be removed from your plan altogether.
Gap insurance provides essential protection to drivers with upside-down loans or those owing more than its actual cash value, or who are experiencing significant depreciation of their vehicle.
It pays the difference between the actual cash value of your car and the amount you still owe on your loan or lease.
Gap coverage provides you with peace of mind. Your insurance provider will cover the difference between actual cash value and what is still owed on a loan/lease agreement and may even cover your deductible costs when your vehicle is declared totaled. Gap insurance can be an invaluable way to safeguard yourself financially if its declared totaled, saving you from replacing costs and loan/lease balances that become due.
As soon as you purchase or lease a new or used car on loan, your lender is likely to require gap insurance as part of the loan agreement or lease lease agreement. This is because vehicles depreciate quickly in value over time; with gap insurance protecting against this situation by covering any difference between what you owe and its actual worth in case your vehicle is stolen or damaged.
Imagine purchasing a $28,000 car that was totaled in an accident; without gap insurance, your insurer would pay out $22,000 of its actual cash value, but you would also owe $5,000 as insurance deductible. Without gap coverage, the remaining $25k of loan/car payment would need to be covered separately; with gap coverage the extra $3,000 can be covered under your policy.
Gap coverage can be purchased from many different sources, including your auto insurer, dealership and lender – although the most economical approach would likely be buying it directly from your auto insurer rather than through either dealer or lender.
Your lender may require both gap insurance and collision/comprehensive coverage as part of the loan or lease contract, so if this applies to you, check it. If gap coverage no longer needs to be used or loan balance has fallen below value of car, cancel it before leaving loan unfinished/lease contract in force – just ensure full financing or full payoff before cancelling!
It pays the interest on your loan or lease.
If you are financing or leasing your new car, gap insurance coverage will often be provided as an optional extra by dealerships or car insurers. Many direct lenders also provide coverage that may be less expensive than what dealers sell; and in some cases auto loan providers even require it as part of your agreement.
Gap insurance may seem unnecessary for some drivers, but those planning to finance or lease their vehicles should strongly consider investing in one. A gap policy pays the difference between your vehicle’s actual cash value and what is still owed under its loan or lease contract; this can come in handy should it become necessary should something happen that necessitates totaling or replacing.
Imagine owning or leasing a vehicle that cost $28,000 but was totaled in an accident, yet its actual cash value had depreciated to only $22,000 due to depreciation – yet you owe the lender $25,000. Gap coverage would pay the difference between this loan balance and its actual cash value – helping prevent an unnecessary financial burden of paying off an auto loan for something you no longer own.
However, you should only cancel gap coverage once your loan payments have reached or exceeded the vehicle’s actual cash value. Price guides such as Edmunds or Kelley Blue Book can help determine this figure so you can remove gap insurance once it no longer needs to be in your policy.
Be mindful that gap insurance does not cover deductible costs or expenses associated with an accident or theft of your vehicle, so if you already have collision and comprehensive coverage on it you likely don’t require this extra cover.
It pays the dealer’s profit.
GAP insurance can be an extremely profitable offering for dealerships, as dealers typically add it on as part of a vehicle sale and/or advertise it as part of financing packages or special offers on that car. By making it seem more affordable to customers and increasing sales volumes for thousands of vehicles at once, dealerships stand to reap significant profits.
Dealerships will often claim that purchasing gap coverage from them is more convenient than through an insurer, as they will cover your deductible while insurers typically won’t. But this isn’t always true and you should conduct research prior to selecting either provider.
Gap insurance can be an essential addition to your vehicle purchase if there’s not much equity built into it when driving it off of the lot, providing protection in case your car is totaled or stolen before most of your loan has been paid back. It can be especially useful if making only a minimal down payment or financing it over several years as depreciated value may often outstrip loan balance for much of that timeframe.
Gap insurance may not be necessary if you make a substantial down payment and finance the vehicle for less than five years, provided enough of your loan balance has been paid off to equal its actual cash value; you can cancel this policy when that has happened – usually nearer the end of its term or after an accident damages its condition further.
Gap coverage can either be purchased directly from an insurer, or purchased as part of your car purchase from a dealer. While the latter option can be more costly as you’ll incur interest on top of your monthly car payment, when considering buying gap insurance it should depend on both how much of your loan remains and its current value (determined using online pricing guides such as Kelley Blue Book or Edmunds).
It pays your deductible.
When purchasing a new car, your salesperson may ask if you would like gap insurance. While this coverage is an optional extra that’s not legally mandated or always worth its additional cost. Determining whether to purchase this type of coverage ultimately comes down to how much is owed on it and its depreciation speed; plus whether or not leasing or financing it.
GAP insurance (Guaranteed Asset Protection or GAP for short) pays the difference between what you owe on a lease or loan agreement and its actual cash value, less your deductible. Typical costs range between $200 and $1,000 depending on car value and other factors. GAP coverage is often purchased by those leasing or financing vehicles and it can be purchased both from dealerships or traditional auto insurers; though purchasing it through your lender or dealer usually works out cheaper overall as this increases interest payments over time.
Imagine purchasing a brand-new car and then totalling it only two years later in an accident, still owing $20,000 on your financing contract but only having an actual cash value of $15,000. Gap coverage would cover this gap of $10,000 instead of leaving you responsible.
Many auto insurers now provide full replacement or new-car replacement policies as an additional type of gap coverage. These plans cover the replacement cost for vehicles totaled or stolen within three years with their original owner or lessee; please check with your insurer regarding age, ownership and mileage limitations as some policies have such restrictions in place. When considering this option, consult with your insurer first as each will offer different information on filing comprehensive or collision claims online, via phone call, or even in person – contact them now if interested!
