Gap insurance is essential, bridging the payment difference between your insurance and the remaining car amount and preventing unexpected financial gaps. For instance, discovering that you owe more on your car loan than the actual value of your totaled or stolen car can be disheartening. However, car insurance compensates based on the car’s value in total loss but doesn’t cover the loan or lease amount owed. Additional coverage, like gap insurance, may be necessary.
What is Gap Insurance?
Gap insurance, or guaranteed asset protection, covers the financial gap between your car’s value and the remaining loan amount in theft or total loss. It serves as a supplement to the payout provided by comprehensive or collision car insurance, which is typically capped at the car’s current value.
In addition, if insurance doesn’t cover the full outstanding amount, you’re responsible for paying the remaining car loan or lease balance. This insurance becomes advantageous in such scenarios. It’s important to note that if you don’t have a car loan or lease, this insurance is unnecessary for you. However, it is designed for those with car loans or leases, preventing financial burden by covering the remaining gap in total loss or theft scenarios.
It functions by addressing the disparity between the value of your vehicle and the outstanding amount on your car loan or lease. Furthermore, it’s sensible if your owed amount surpasses the car’s value, especially with extended loan terms or no down payment. It’s worthwhile to compare the costs associated with both options to determine which aligns better with your specific requirements.
How Does It Work?
Once you acquire or lease a new car or truck, its value starts to decline as soon as it departs the dealership. Within the initial year, many vehicles experience a 20 percent reduction in their worth. Conventional auto insurance policies compensate for a car’s depreciated value, meaning they pay the prevailing market value during a claim. However, with minimal upfront payment, financing a new car may lead to a loan amount surpassing the current market value in early ownership.
In a major accident or total loss, gap insurance fills the gap between the current vehicle value (standard insurance coverage) and the outstanding loan amount. Imagine buying a $25,000 car and having a covered collision resulting in a total loss while still owing $20,000 on the loan.
Additionally, collision coverage pays up to the depreciated value, let’s say $19,000, leaving a $1,000 gap on a $20,000 loan. Gap insurance covers the remaining balance on your car loan or lease in case of a total loss, whether from an accident or theft. It becomes effective after comprehensive and collision coverage, which are obligatory when acquiring or leasing a new vehicle.
These insurance types handle expenses related to your car, such as damages from accidents, fire incidents, or theft. Nonetheless, comprehensive and collision insurance settlements are limited to the current value of the car at the time of the incident. In cases where your outstanding loan or lease exceeds this value, gap insurance shoulders the responsibility of covering the disparity.
What Does Gap Insurance Not Cover?
Here are some common expenses that gap insurance usually does not address:
- Auto Insurance Deductible
- Late Fee Penalty
- Security Deposits
- Extended Warranties
- Carry-over Balances from Previous Loans or Leases
- Lease Penalties for High Mileage or Excessive Use
- Charges for credit insurance
- Down Payment for a New Car
It proves valuable in specific situations, but it’s important to be aware of what it typically doesn’t cover.
How Much Does It Cost?
The costs vary, influenced by factors like state, driving record, age, and vehicle details, similar to regular car insurance. However, your insurance provider typically has the option to include gap insurance as an endorsement of your existing coverage.
Dealerships offer this plan, but it’s often pricier than adding it to your existing car insurance policy. Moreover, it’s advisable to assess and compare the expenses associated with both options before deciding on the most suitable approach for your circumstances.
When To Buy Gap Insurance
Several scenarios may put you in a vulnerable position about your auto loan:
Minimal or No Down Payment
A minimal or no down payment on a financed car leads to negative equity, where the loan amount exceeds the actual cash value. In addition, it could take several years for the loan balance and the car’s value to align.
Trading in an Upside-Down Car
A lack of down payment on a financed car creates negative equity, with the loan amount surpassing the actual cash value. This additional balance could become a concern in the event of a total loss or theft.
High-mileage plans
Rapidly accumulating miles on your car can substantially accelerate its depreciation. However, the faster your car loses value, the more likely you are to outpace your loan payments.
Long-Term Loans (Over 60 Months)
Opting for a lengthy car loan extends the time it takes to reach the break-even point, where the loan balance equals the car’s value. This delay exposes you to an extended period of negative equity.
Typically, comparing the costs and terms of gap insurance from various sources is crucial to finding the most suitable option for your needs.
Where Can You Get Gap Insurance?
Car dealers may suggest gap insurance, but many insurers offer it too, often at a more affordable rate than dealers. Adding gap insurance to collision and comprehensive coverage usually leads to a modest increase, typically around $20 per year in annual premiums.
Comparing the costs and benefits from both your car dealer and insurance provider can help you make an informed decision on acquiring gap insurance.
Additionally, you can purchase this insurance from various sources, including car insurance companies, dealerships, and banks or credit unions.
How To Get Gap Insurance
Typically, you can include gap insurance in your policy only if there’s still an outstanding balance on your vehicle or lease. The specific criteria may vary among insurers, but commonly, they may necessitate one or both of the following:
- Your car is no older than two to three years old.
- You are the original owner of the vehicle.
There are two primary methods for acquiring this insurance:
Through Your Auto Insurer
This involves integrating gap insurance into your regular insurance policy.
Via the dealership or lender
It can be bundled into your loan payments. However, this arrangement means you’ll be paying interest on the gap insurance cost throughout the loan’s duration, making the coverage more expensive over time.
When purchasing through your dealership or lender, consider the following steps:
Review your auto loan contract.
Examine your auto loan agreement to determine whether gap insurance is a mandatory requirement; not all lenders insist on it. However, comprehensive and collision coverage are generally obligatory.
Leasing Agreement Check
If you’re leasing your car, the dealer might automatically include gap insurance, so verify the details in your lease agreement.
Switching Providers
If you got gap insurance from the dealer and want to switch to your insurer, check if you can remove it from your car loan contract. Ensure continuous coverage during the transition to your new provider.
Alternative To Gap Insurance
There are alternative coverage options to this insurance that can protect in case of theft or total loss. Depending on your priorities, you might consider one of these alternatives:
New-Car Replacement Insurance
If your main priority is obtaining a new vehicle rather than settling the remaining balance on your old one, new-car replacement coverage may be a better fit. Although pricier than gap insurance, this coverage assists in funding a new car of the same make and model, deducting only your deductible.
Better-Car Replacement Coverage
In case your vehicle is declared a total loss, this coverage provides funds for a newer model with lower mileage, offering an upgrade from your previous vehicle.
Conclusion
Gap insurance is optional car insurance created to cover the difference between a car’s current cash value and the remaining loan or lease balance. In a total loss event, gap insurance bridges the gap, covering the difference between the driver’s insurance reimbursement and the remaining financing or lease amount.