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Your car's value starts depreciating when you drive off the lot. This could be a problem if you total your vehicle in the early stages of ownership, as the standard policy only provides coverage up to the depreciated value of your car. Your loan amount may exceed the current value of your vehicle, leaving you to pay the remainder of the loan.
If you're in this predicament, gap insurance can be a lifeline. It covers the rest of your auto loan, so you don't have to worry about paying it off when your vehicle is no longer drivable.
Gap insurance stands for "guaranteed auto protection." It covers the difference between what you owe on the car and what it's worth at the time of a covered loss. Some policies cover the difference, while others cover a set dollar amount. It's important to clarify how your insurer pays gap insurance claims so you know exactly how much coverage you're getting.
To qualify for gap insurance, you need both comprehensive and collision coverage and pay an additional premium. After a total loss due to an accident, theft, or other events that may render your vehicle un drivable, your insurer pays out the remainder of your loan.
For example, say your car is worth $20,000, but the balance on your auto loan is $25,000. Full coverage insurance pays $20,000 to replace your vehicle, and gap insurance compensates you for the remaining $5,000.
Some lenders (though not all) mandate drivers to carry gap insurance to protect their investment after a total loss. If you get into an accident with an outstanding auto loan and fail to make payments, your lender has the right to repossess your vehicle. Read the fine print of your financing or leasing contract to determine if gap insurance is a requirement.
If you put less than 20% down on the purchase price of your vehicle or have a loan term longer than 60 months, your vehicle's value is likely less than your auto loan in the beginning. This may apply, especially if it depreciates faster than other types of cars. Consider gap insurance if you contribute a smaller down payment with longer terms.
Gap insurance is likely beneficial if you drive in an area with higher accident, crime, and volatile weather rates. This is particularly true if you rely on your car to commute frequently.
You can purchase gap insurance through various providers, including car loan lenders, auto dealerships, and private insurance companies. Your costs can vary widely depending on the insurance company you choose.
Policygenius reports that gap insurance through your auto loan lender or car dealership could cost upwards of $500 annually. In contrast, gap insurance through your car insurance provider is usually priced at an additional $3 to $50 per year.
You can bundle gap insurance with your full-coverage auto insurance policy for increased savings. Insurers usually reward loyalty by offering better rates on gap insurance. Plus, it's more convenient to file a claim by keeping your coverage with one provider than with multiple.
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Gap insurance protects you from financial strain by covering the remainder of your loan in the event your car is totaled or stolen. You can rest easy knowing you carry less financial risk and won't have to go into debt or dip into your savings to cover your loan after a car accident.
One drawback of gap insurance is that it may not be for everyone, particularly those who own their car. You may also not need gap insurancee if the balance on your auto loan is less than your car's worth. This is likely if you make a substantial down payment and apply for shorter financing terms, leading to a lower loan amount. You may want to opt out of coverage if you have enough savings to pay for the "gap" out-of-pocket.
Another drawback is that gap insurance is an additional expense on top of your regular auto insurance premiums, but it can be affordable. The best way to save money on gap insurance is by comparing your options.
Drivers have several options regarding places to purchase gap insurance.
Car dealerships often offer gap insurance when you purchase or lease a car, and lenders offer gap insurance as part of your auto loan. Purchasing gap insurance through these providers can be convenient as it'll likely be included in your car payments. But, it tends to be significantly more expensive than car insurance companies' insurance.
Gap insurance from insurance companies is often the most affordable option, as you can bundle them with your existing car insurance policy. However, not all insurers sell gap insurance. If that's the case, Policygenius notes that the price discrepancy is so drastic that you may be better off looking for an insurer that offers gap insurance than staying with your current one.
Is gap insurance worth it? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
Gap insurance may be worth it, but it depends on your individual circumstances. If you're upside-down on your loan, have a high-risk vehicle, or it's a requirement on your loan contract, getting gap insurance is a smart idea.
Do I need gap insurance if I have full coverage? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
You must purchase gap insurance separately or as an add-on to your insurance policy, even if you have full coverage. A full coverage policy includes comprehensive and collision coverage but doesn't automatically include gap insurance.
How long do I need gap insurance? Chevron icon It indicates an expandable section or menu, or sometimes previous / next navigation options.
You need gap insurance as long as you owe more on your car than it's worth, which is usually applicable in the early years of your policy. You can cancel it once your value exceeds your loan balance.
