If you’ve recently bought or leased a car you’ve probably heard the phrase “gap insurance.” Although it may seem like an add-on that’s not necessary it could actually be a lifesaver for your finances in the right conditions. What is it exactly, and how do you use it? We’ll explore this commonly-ignored aspect of insurance for cars to determine if it’s something that you need to think about.
Understanding Gap Insurance
Gap insurance, also known as “Guaranteed Asset Protection,” is a form of insurance that safeguards your financial assets in the event your car is damaged or stolen and your insurance policy pays is less than the amount you are obligated to pay for your lease or loan. It basically covers your “gap” between your car’s current market value and the amount owed on your loan.
The value of vehicles decreases rapidly, and often dropping value when you leave the lot. Insurance policies for autos typically will reimburse you based on the car’s cash value at the date of the loss, not on what you initially agreed to pay for it. If you are liable for more on the lease or loan you have taken out than what your vehicle is worth it could leave you with a large cost to pay for the difference. This is why gap insurance is important. It helps to cover this financial gap.
Who Should Consider Gap Insurance?
Gap insurance may not be for everyone, but it’s advantageous for those who are in certain financial circumstances. If you’ve made a modest down payment on your car or financed it with the course of a loan for a long time or even leased your vehicle in the past, you could end up “upside down” on your loan, meaning that you are owing more than the car’s actual worth. This is where gap insurance can prove to be worth it.
Also, if you own an automobile that is depreciating quickly, such as the majority of luxury vehicles or electric vehicles, gap insurance may be a good idea. It’s also a great security net for drivers who are new to the sport or people who don’t have enough funds to cover an unexpected cost incurred if their vehicle is stolen or damaged.
How Gap Insurance Works in Practice
Imagine that you purchased a brand new car for $30,000. However, after a year of use it’s now worth $25,000 because of depreciation. In the event of an accident, it will cost you your vehicle and your insurance company will pay you a sum of $25,000. Yet, you’re still owed $28,000 for your loan. If you didn’t have gap insurance, it would be difficult to be forced to pay for the remaining $3,000 by yourself. If you have gap insurance the remaining $3000 would be covered, taking you out of financial burden.
It’s important to know that gap insurance doesn’t cover costs such as late loans extended warranties, late loan payments or any negative equity transferred from a previous loan. It only covers the difference between your car’s value and the balance of your loan.
Where to Get Gap Insurance
Gap insurance is available in a variety of forms and you can buy it through your vehicle dealership, your lender or through your auto insurance company. Each choice has its advantages and cons, which is why it’s important to shop around and look at prices. Dealerships usually offer gap insurance in conjunction with the purchase of a car however this may be the most costly route. A lot of insurance providers offer gap insurance as a low-cost supplement to your existing policy, which could help you save money.
If you choose to purchase gap insurance from your dealer or lender ensure that you read the terms thoroughly. In some cases the cost of the gap insurance is included in your loan, which means that you’ll have to pay interest in the future.
When to Drop Gap Insurance
Although gap insurance can provide important protection, you don’t have to use it for long. After you’ve paid down the loan in a way so that the amount you owe less than the actual cash value, you are able to completely end the coverage. Monitor your loan balance regularly and the depreciation of your car to determine if the gap insurance is no longer needed.
If you sell or trade in your car sell your vehicle prior to it being fully paid off, the gap insurance policy is likely to expire immediately. In the same way, if you take care to pay off your loan in advance then you won’t require the extra security.
The Cost of Gap Insurance
The cost of gap insurance can vary based on the way and where you buy it. If you are adding it to your insurance for autos it is possible the cost to be between amount of $20 to $40 annually. The purchase of gap insurance from a dealer or loan provider, however, could result in a single payment that ranges from $500 to $700 or greater.
While it may seem as if it’s an additional expense however, the peace of head that gap insurance offers can exceed the price. Being assured that you won’t end up financially burdened should unexpected events occur is a huge benefit for many automobile owners.
Final Thoughts on Gap Insurance
Gap insurance provides a basic but effective method of protecting yourself from financial stress should there be a complete car theft or loss. It’s not an option for all people however, for those who fall into the criteria, it could be a vital security net. Before you purchase gap insurance, you should look at your financial situation, your car terms and trends in depreciation to determine if it’s a good option for you. While it’s recommended to be hoping to be lucky, having gap insurance will ensure you’re covered for the most dire scenarios.