If you currently pay on a car loan or lease, your car may be valued for less than what you owe on it. Meaning, that if your car is totaled in an accident, gap insurance would help you pay off your loan or lease, minus the deductible.
How does Gap Insurance Work?
New cars begin decreasing in value, or depreciating, the minute you drive off the lot. It’s not an uncommon scenario for a car to depreciate in value faster than most people can pay off their car loans. Which means if your car where to be totaled, the insurance company would only cover the cost of its current value. If you owe more than the value of your car’s current market value, you’d be stuck repaying any remaining balance owed on your loan.
For example: Let’s say you borrowed $20,000 for a new car. One afternoon, while it was parked, a big tree limb fell and crushed your car. You file a claim, and the insurance company totals it out at $15,000. The problem is your loan balance is still $20,000 and you’re left with a $5,000 funding gap to pay off your loan. That’s why many find that gap insurance is an attractive option.
Is Gap Insurance Required?
The short answer is no, but other types of car insurance, namely liability, are required by law in most all states. However, other kinds of insurance are not required by law, but are still required when taking on a loan or a lease.
Most lenders require borrowers to have comprehensive and collision insurance, to cover the costs to repair or replace your car. This is because the lender wants to ensure nothing keeps you from making your payments on time. On the other hand, most lenders don’t require gap insurance, gap is something you can choose additionally to protect your finances. Making that choice comes down to whether you can afford to (or want to) take on the risk of paying off the balance of your loan if something were to happen to your car.
Factors to Consider when Buying Gap Insurance.
Type of insurance: In most cases, you can get gap insurance only if you already have comprehensive or collision coverage on your car.
The current value of your car: If your car were totaled tomorrow, the value listed in a source such as Kelly Blue Book will not necessarily equal the reimbursement that you will receive from your insurance carrier. However, that listing can give you a good ballpark figure to compare against your current loan balance. So, if your car got totaled tomorrow and you still owed on it, gap insurance would help.
Your down payment and loan: For example, if your down payment were at 20 percent and you’re paying off the loan in 36 months or less, you’re likely staying ahead of any depreciation. However, if you have a 60-month loan, gap insurance would protect you when your loan balance exceeds your vehicle’s Actual Cash Value.
Fast depreciation: Some makes and models hold on to their value longer than others. If your vehicle depreciates more quickly than average, gap insurance may be a good idea.
How much does it cost: Cost depends on many factors, including the make and model of your vehicle. Most often, it’s only a small increase to your current premium. The dealership may offer a gap insurance policy to you when purchasing a new vehicle. It’s important to compare rates before saying yes, because you may get a better deal from your current insurance carrier.
Gap insurance isn’t complicated. It can provide extra protection for your finances while you’re paying on a lease or loan. Contact one of our local agents today for additional details about gap insurance. We are always here to help and can provide you a quote.