What is Gap Insurance and When Do You Need It?

What is Gap Insurance and When Do You Need It?

Can you imagine a scenario where you’re still financing your new car and it gets declared a loss because of a theft or an accident? While your car is completely written off, you’re still paying the loan and it might be really tough to finance a new car in such a situation. Many car owners find themselves in such situations because of poor planning or a lack of understanding about the right insurance plans for their individual needs.

Why Does a Gap Exist?

While a comprehensive or collision coverage is required by law and should be bought by every car owner, it might not be enough in worst-case scenarios. Most car owners tend to think that if their car is totaled, the insurance company will pay the full amount they paid for their car or give an equivalent replacement and thus, they can move on with their lives with no financial burden. However, an insurance company will only pay the current value of your car at the time of the claim. If you owe more on your car than what it’s actually worth, you’ll find a big gap in this payment that you will have to pay from your own pocket. A gap occurs when you have an outstanding amount on your loan that’s much higher than the current market value of your car.

What is Gap Insurance?

If your car is declared a total loss, your insurance company isn’t obliged to pay its entire value, unless you have bought a new-car replacement coverage. Your insurance will only pay the market value of your car, which will mostly be less than what you owe on your car loan. If you owe more than what your car is worth, it is known as being upside-down on your loan. Gap insurance, also known as Guaranteed Asset Protection, helps you pay the difference between your loan amount and the current market value of your car.

What are the Indicators that You Need Gap Insurance?

1. You have financed your car with little or no down payment.

This might cause you to be upside-down on your loan the minute you drive off the lot.

2. You traded in an upside-down car and added the loan amount to your new car’s loan.

The extra balance on your loan will be a burden if your car gets totaled by an insurance company.

3. You purchased a car that doesn’t have a great resale value.

If you buy a car that tends to depreciate faster than others, you will be upside down pretty quickly.

4. You tend to cover lots of miles per year.

This too can lead to a faster depreciation of your car.

5. You have a car loan for long-term (more than 60 months)

It will take a long time for you to pay off your car loan and hit the break-even point.

Things to keep in mind while buying gap insurance:

  • You must have comprehensive or collision coverage to be able to claim your gap insurance or else your insurance company won’t honor the policy.

  • You can buy gap insurance along with your car’s loan or add it separately to your insurance plan or even buy it from your dealer.

  • Make sure to shop around to get the best deal on your gap insurance.