Gap insurance can provide vital relief if you lease or finance an auto loan. In case your vehicle is totaled, this insurance will provide compensation equal to its actual cash value, rather than what remains due.
Gap coverage provides protection for any gaps that exist between car insurance policies. You can purchase this coverage separately or add it as part of a standard auto policy.
What is GAP Insurance?
GAP insurance is intended to bridge the gap between what you owe on your loan or lease agreement and your car’s actual cash value in case of an accident, theft, or total loss. It covers any difference between what is owed on your vehicle and its current market value – determined by an insurance company when your vehicle has been declared “total loss”.
Gap insurance is typically made available to drivers who have financed or leased their cars, though lenders or lessors may require gap coverage as part of your contract with them. You can purchase gap coverage directly through your lender; however, oftentimes buying it through your car insurer will be cheaper.
Many dealerships or auto lenders provide gap coverage, and typically fold the cost into your monthly loan payments. This makes the coverage more costly than purchasing it through your car insurance provider as you will also incur interest charges on that amount. Furthermore, dealerships and lenders might only offer limited selections of gap policies.
Gap insurance should not be seen as a replacement for full comprehensive and collision policies that cover repairs or replacement of your car in case it’s damaged or stolen; those types of policies have their own deductibles that should be considered when considering them as alternatives to gap coverage.
Gap coverage purchased either through your dealer or insurer should typically be cancelled as soon as your loan balance matches up with its current value, which you can do by consulting online pricing guides such as Edmunds or Kelley Blue Book.
Gap insurance can be invaluable if you find yourself with an upside-down loan, which occurs when the current market value of your car exceeds what was paid for it. This is often an issue with newer vehicles with rapid depreciation rates; many drivers choose gap insurance to give themselves peace of mind; but this decision may not apply to everyone.
How Does GAP Insurance Work?
Gap insurance protects drivers against financial disaster in the event their car is totaled and its actual cash value does not cover what was owed on its loan or lease contract. By covering this gap between actual cash value and what was actually owed on a loan or lease contract, this coverage helps to guard them from potential financial ruin if their insurance payout falls short of what was actually owed on it.
Gap coverage may be provided either by your lender or through an independent auto insurance agency, with the latter option often being more cost-effective. Car dealerships also sell gap coverage; it may even be included as part of their finance contracts; however, Trusted Choice reports that car dealerships could charge more due to unregulated profits on this form of coverage. Furthermore, adding it onto an auto loan typically results in paying interest on its cost as well.
Gap insurance should generally be considered worthwhile in cases involving totaled vehicles or theft. It can also prove valuable if you decide on short-term loans with less than 20% down, which increase your chance of becoming upside-down on your loan balance.
To determine whether gap insurance is right for you, research the price and anticipated depreciation rate of your vehicle. Also take into account your driving habits and risk of an accident; gap coverage might be beneficial if you plan to make frequent city trips; otherwise it may not. However if you plan to use your car more for off-roading and road travel purposes instead, gap coverage might not be.
As it’s essential to know when to cancel gap insurance, knowing when and why to drop it can also be crucial. Most lenders and lessors allow customers to opt-out once their loan balance drops below its value of the car they’ve leased; you should also cancel it once ownership of the car has transferred, unless your contract specifies otherwise. Otherwise, paying extra for something you don’t require. By researching vehicles carefully and making smart financial choices you may reduce or even eliminate your need for this coverage altogether – for instance purchasing something worth more than its asking price may do just this – making smart financial decisions can reduce or even completely eliminate needing for gap coverage altogether!
Do I Need GAP Insurance?
As with many decisions in life, there’s no easy answer when it comes to gap insurance – only you know your specific circumstances can determine whether or not it applies. When making this decision, consider your equity position in your existing car as well as any future purchases or lease agreements you make.
Gap insurance can be obtained either through the dealership or directly through an auto insurer. When you buy it from the dealer, it will usually come as part of your loan or lease agreement; however, many traditional car insurers also provide gap coverage as an add-on.
Both options offer their own set of advantages: If purchasing from a dealership, financing may help make monthly payments more manageable if cash flow issues or credit building is an issue; buying gap insurance through your traditional provider might be more cost-effective as most add around $20 annually for gap protection coverage in addition to your regular car insurance premium payment.
Gap insurance can help fill any shortfall between what your car is worth and the amount owed on its loan or lease contract if it is totaled in an accident, stolen, or depreciates quickly as is common with new vehicles – particularly SUVs and trucks which typically lose value faster than sedans.
To submit a gap insurance claim, submit your vehicle’s actual cash value (ACV) and loan or lease balance to your primary insurance provider. When your car has been declared totaled, gap insurance companies will cover any differences between lender payments and ACV minus your deductible amount.
If your current vehicle has significant equity and you can pay off its remaining loan balance without financing another, gap insurance is no longer necessary and should be discontinued as soon as your loan balance equals its actual value – sooner ideally! To save yourself the hassle and expense, drop it as soon as your loan balance matches up with its actual worth – to prevent paying for unnecessary coverage.
How Much Does GAP Insurance Cost?
GAP insurance typically costs about 5%-6% of an ACV determined independently, and drivers who purchase it can claim any differences between this figure and what their lender still owes after totaling or stealing their vehicle by filing a gap claim with their provider as soon as their primary insurer declares the vehicle a “total loss” and gives an insurance settlement settlement amount.
GAP insurance can be an essential protection measure for drivers who made a sizable down payment on their car or have paid enough towards their auto loan that they are no longer “upside down.” Leasing or financing agreements often come with gap coverage as standard coverage may have age and mileage restrictions and do not provide total market value coverage in case your vehicle is totaled or stolen.
Progressive’s coverage only pays up to 25% of a vehicle’s actual cash value after it has been totaled or stolen, even though its actual debt may far outstrip that amount. Gap coverage from your insurance provider tends to be less costly and typically can be added onto an existing policy for an affordable monthly premium payment plan.
Cost of gap insurance varies by insurer and can be negotiated when shopping for an auto loan or lease. While dealerships and banks might sell their own versions, purchasing this coverage through your regular car insurer often is cheaper and allows you to cancel it once your loan balance no longer requires it.
Gap insurance purchased through your dealership may be more costly due to being added onto your loan or lease contract and accruing additional interest payments on it in addition to what you owe on the vehicle itself.
