What is Gap Insurance?
Gap insurance is a relatively inexpensive coverage that can substantially reduce the financial burden caused by a car wreck, yet is often ignored until it is too late. If you are currently financing a vehicle, read on for more information about this important insurance protection.
In the event that your car is totaled, gap insurance coverage closes the “gap” between what a vehicle is worth and the amount of the loan on the vehicle. This “gap” is often widest when the car or truck is newly purchased and can amount to thousands of dollars.
It’s a well known fact that a car or truck begins to depreciate the minute you drive off the dealer’s lot. Some vehicles, especially if purchased new, depreciate quickly. Depending on the age of the vehicle and the interest rate of the vehicle loan, it is not unusual for the depreciation to exceed the reduction in the loan made by the monthly payments, leaving you with a car or truck worth less than the amount remaining on the loan. If your car is totaled in a wreck, the at-fault party’s insurance will only pay you for the replacement cost of your car. The liability insurance is not responsible for paying off the balance of the loan. If the amount remaining on the loan is greater than the value of your car, you will be responsible for paying the difference.
This is where gap insurance can help. For instance, if the value of a replacement vehicle is $10,000, but you still have $15,000 remaining on your loan, the liability insurance would pay $10,000 and the gap insurance would pay the remaining $5,000 to pay off the loan. This would prevent you from having to pay the remaining $5,000 out of pocket.
One more tip: Gap insurance can often be added to your existing coverage for just a few dollars a month if purchased through your auto insurance company. Car dealerships often offer to sell you gap insurance at a much more expensive price, so be sure to shop around and get the best rate.