You’ve heard of GAP insurance but might not know exactly what it is, and more importantly, if you need it as part of your insurance policy. After you’ve bought a brand-new car and have driven it for a few months, its value typically depreciates at a faster rate than the pace at which you can pay off the loan. The depreciation is actually about 20%-30% within the first few months. For that time period and possibly longer, you may find yourself “upside down” on your loan, or owing more than what the car is worth, if you didn’t purchase the car with cash.
Pretend the unthinkable happens and you’re in an accident that totaled your new car within the first month of owning it. You assume the insurance company will cover the full cost of the vehicle, right? Sorry, but that’s not the case. If you happen to be in an accident while you are “upside down” on your loan, and your vehicle is totaled, you will not be given the amount you owe on the loan from your insurer.
When you carry the right coverage on your policy, you will be reimbursed by your insurance company with the amount of money the car was worth, or cash value, which you can use to pay off your loan. But when you owe more than the car is worth, you will have a remaining balance of your loan and you will need to pay the loan company. How can you prevent this losing situation?
You can refer to the difference between the amount of the loan you still owe and the cash value of your vehicle as a gap. This gap is what formed GAP insurance.
GAP, or guaranteed auto protection, insurance is insurance for the amount you are “upside down” on for the loan. To finish paying off the loan when the car has been totaled with the insurer’s money, you will need to purchase gap insurance.
GAP insurance is an insurance that is really only needed until the car’s cash value is equal to or more than the amount owed for the car. If you have an auto loan or lease where you owe more than cash value of the car, you do not need GAP insurance. If you bought your car outright and do not have a loan, you do not need to purchase GAP insurance since the cash value of the car is more than any loan amount. If you took out a small loan for your vehicle, you do not need GAP insurance as long as the cash value of your vehicle is worth more than what you owe on the loan.
Don’t assume that just because you have auto insurance your totaled vehicle will be covered 100% and paid for by your insurance company. Your auto insurance company will only give you the cash value of your vehicle and nothing more. If you owe more money for your car than its cash value, look into purchasing GAP insurance to prevent any financial loss.
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