Do You Really Need Gap Insurance on Your Car?
Here’s what you need to know if you’re financing or leasing a car
Car insurance is required to be financially protected while on the road. You may also need to acquire gap insurance in addition to liability and collision coverage. Gap stands for “guaranteed auto protection” in the insurance sector.
The type of vehicle you buy or lease will determine whether you require automobile gap insurance. Is gap insurance, however, worthwhile? If you believe you owe more money on a vehicle than your comprehensive auto insurance coverage would pay out in the event of a claim, it could be.
KEY TAKEAWAYS
- Gap Insurance – When the cost for a total loss is less than the outstanding loan or lease debt, Guaranteed Auto Protection reimburses the automobile owner.
- People who put no money down and choose a long payoff period benefit the most from gap insurance. They may owe more on the car than its current worth for a few years.
- It also makes sense for people who want to lease rather than buy a car.
- If you put down at least 20% on the automobile when you bought it, or if you’re paying off the loan in fewer than five years, you might be eligible to avoid gap insurance.
- Gap insurance isn’t required throughout the life of the vehicle; it’s only required till your loan balance does not exceed the vehicle’s worth.
What Is Gap Insurance on a Car?
Gap insurance is a type of extra auto insurance that pays the gap between the insured value of a vehicle and the amount owed on the loan or lease. Gap insurance will cover the difference between your auto insurance payout and the amount you owe on the vehicle if it is totaled or stolen before the loan is paid off.
Your lender may need gap insurance for certain types of automobiles, trucks, or SUVs if you’re financing a vehicle purchase. This includes luxury cars and SUVs, as well as some types of sports utility vehicles, which may degrade and lose value at a higher rate than usual.
How Gap Insurance Works
Early in a car’s life, it’s possible to owe the loan or leasing company more than the car is worth. Paying monthly until you have enough equity in the car is possible with a small down payment and a long loan or lease term.
When it comes to filing claims and vehicle values, equity must be equal to the car’s current value. If the automobile is totaled, your usual insurance will pay that value, not the price you bought. The issue is that automobiles depreciate rapidly during their first few years on the road. In fact, the average car loses ten percent of its value within the first month of ownership.
If your car is totaled, your insurance won’t cover the expense of replacing it with a new one. You’ll get a check for the value of a car similar to yours on a used-car lot. This is referred to as the vehicle’s actual cash worth by insurers.
That particular gap is not covered by gap insurance. The reimbursements are calculated on the basis of actual cash worth rather than replacement value, which can assist you avoid financial losses.
Car Gap Insurance Example
Let’s pretend you just bought a new automobile for $28,000. You put down 10%, lowering the total cost of the loan down to $25,200. You secured a five-year car loan. Let’s pretend you got one of those zero-percent new-car financing packages, which means your monthly payment is $420. You’ve paid $5,040 after a year. You owe a total of $20,160.
The car is destroyed a year later, and the insurance company declares it a total loss. You are owed the entire current worth of that vehicle, according to your auto insurance policy. Your car, like the average car, is now worth 20% less than you paid for it a year ago. That’s a total of $22,400.
Your collision insurance will cover the remaining balance on your auto loan, leaving you with $2,240 to put down on a replacement vehicle.
What if, on the other hand, your car was one of the types that didn’t keep its worth as well as others? For example, let’s imagine it’s lost 30% of its value since you bought it. Your insurance check will be $19,600 in that situation. You owe $560 to your lender. And you’ll still need a new automobile, which is why car gap insurance is essential.
Here are two examples of what you could pay, with or without car gap coverage.
Do You Need Car Gap Insurance?
You’ve probably heard the expression “upside-down” when it comes to a home mortgage obligation. Whether the financed object is a house or a car, the premise is the same: the financed item is currently worth less than the sum of the loan that was taken out to acquire it.
This isn’t as bad as it appears. If you place only a tiny down payment on a house or automobile and pay the rest in small monthly installments over five years or more, you won’t own much of it free and clear right away. Your ownership share grows as you pay down the principle, and your debt diminishes.
Gap insurance, at the very least, covers the shortfall, ensuring that you are not liable if the car is totaled.
You might want a gap policy if…
You’ve purchased a new vehicle, it is likely to lose about 30 percent of its value over the first 12 months you drive it. If you made a down payment of less than 30 percent, you may become “upside down” on the loan quickly – meaning your vehicle would soon be worth less than what you owe the bank. If you find yourself in this situation and you know you would not be able to afford thousands of dollars out of pocket in the event of an accident, gap insurance will provide both peace of mind and the money you would need to pay off the loan balance.
You can probably skip the gap policy if…
If you put more than 25 percent down on the purchase of your new or used vehicle, or you have an emergency fund available for use in the event of a total loss accident, it’s probably safe to skip the gap coverage and save yourself several hundred dollars per year.
If you’d like some additional auto protection but aren’t sold on a gap policy, talk with your auto insurance provider. Many offer additional coverage options that may suit your needs.
Pros and Cons of Car Gap Insurance
These days, buying a new car is a costly prospect. The average loan for a new car is more than $32,000. Currently, the average loan period is 69 months.
Even if your lender authorized it, you wouldn’t consider skipping collision insurance on that car. However, you might want to consider gap insurance to complement your collision insurance for the time that you owe more on the automobile than it is worth. If the automobile is totaled, your collision insurance policy will pay out that amount.
This is particularly frequent in the first few years of ownership, especially if you put down less than 20% and extended the loan repayment term to five years or more. You can know if you need gap insurance by looking at a Kelley Blue Book. Is the value of your car currently less than the loan balance? If that’s the case, you’ll require gap insurance.
How Much Does Gap Insurance Cost?
According to the Insurance Industry Institute, you can add gap insurance to your ordinary comprehensive auto insurance policy for as low as $20 a year.
However, your cost will vary depending on the regular insurance laws. That is, your state, age, driving record, and the car model all go into the price.
It is usually priced at 5% to 6% of the collision and comprehensive premiums on your auto insurance policy by a major insurer. For example, if you pay $1,000 per year for both coverages, gap insurance will cost you only $50 to $60 extra each year to protect your loan.
According to Bank Rate Monitor, going to an insurer for gap coverage is frequently less expensive than going through a dealer or a lender.
Gap Insurance FAQs
Here are some brief answers to the most commonly-asked questions about gap insurance.
Is Gap Insurance Worth the Money?
Gap insurance is absolutely worth the money if you owe more on your car than it is now worth at any point in time.
If you put less than 20% down on a car, you should purchase gap insurance for the first few years. You should owe less on the car than it is worth by that time. If the automobile is totaled, you won’t have to pay the difference between the insured value of the car and the amount you owe a lender out of pocket.
Take advantage of a dealer’s periodic car-buying incentive, this gap insurance is very valuable. If you receive a bargain with a modest down payment and three months “free,” you’ll almost certainly be in default on your loan for a long time.
Do You Need Car Gap Insurance If You Have Full Coverage?
The term “comprehensive” refers to a policy that provides complete coverage. It covers accidents as well as unforeseeable events like vandalism or floods. However, it only covers the car’s actual cash worth, not the purchase price or the loan balance.
The difference is covered by gap insurance.
So, if you owe more than the car is worth, you’ll need gap insurance. This is most likely to happen during the first few years of ownership, when your new car depreciates faster than your loan debt decreases.
Once your loan debt is low enough to be covered in full by a collision insurance payment, you can cancel the gap insurance.
What Does Gap Insurance Do?
Consider it an extra layer of protection for your car loan. For a totaled car, the gap policy will cover the difference between the comprehensive and collision coverage.
How Do I Get Gap Insurance?
Ask your motor insurance company if they can add it to your existing coverage. This is the simplest and most cost-effective option. To make sure you’re receiving the greatest bargain, compare rates online.
A dealership will almost certainly offer a gap coverage, but it will almost certainly be more expensive than a big insurer’s. In any case, double-check that your vehicle doesn’t already have gap insurance. Gap coverage is frequently included in the price of auto leases.
Can You Get Gap Insurance After You Buy a Car?
Yes. Your best bet is to contact your auto insurance company and inquire about adding it to your current coverage. Your insurer should be able to explain your alternatives and estimate the cost of adding gap coverage. Make sure to shop around for the greatest car insurance quotes to obtain the best deal.
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