Our top pick for gap insurance: Progressive
- Broad coverage
- Transparent pricing tools
- Accident forgiveness on small claims
- Stack a variety of discounts for multiple cars
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Gap insurance, also known as guaranteed asset protection, protects your car loan or lease if your car gets totaled or stolen while you’re making payments. However, while many people benefit from this low-cost coverage, not everyone needs it.
The biggest benefit to gap insurance is that it covers you if you owe a large amount on your car loan. New cars are at risk for having a loan amount left over during the first few years after you buy it. That’s because your new ride will depreciate as soon as you drive it off the dealer’s lot. And if you need a car and end up with an outstanding debt after an accident, you’ll have a harder time getting a car loan for a replacement vehicle.
Consider buying gap insurance if:
You won’t need gap insurance if:
Gap insurance usually costs as little as $20 to $30 a year or $2 a month as an add-on to your car insurance policy. You typically need it for a few years while you pay back your loan. With most car insurance companies, you can add gap insurance to your existing policy. Most companies offer gap coverage, including Progressive, Allstate, AAA, Nationwide and USAA.
The best deal is to get gap insurance as an add-on to your car insurance. Nearly every car insurer lets you buy gap coverage with a full coverage policy that has both collision and comprehensive coverage, which you’ll need for your car loan anyway.
Your car dealer or financer also will offer gap insurance, but it’s often very expensive — to the tune of several hundred dollars a year, compared to the $20 you might pay through your car insurance.
Don’t let your lender or dealer convince you that gap coverage is necessary to drive off the lot or get your loan approved. It’s almost never a good financial decision to get gap coverage from your car dealer because you’d be paying hundreds more for the same coverage.
Gap insurance protects you for the amount, or gap, left on your loan if your car is stolen or totaled. With a car loan, you’re paying for a brand new car that depreciates the minute you drive it off the lot. If you need your car totally replaced, car insurance only covers your car’s current market value, not your car loan amount.
Some lenders require gap insurance, but you’ll have to check your loan contract to make sure.
Here’s a common example of how gap insurance might help you:
With a car lease, you make a small down payment and pay monthly to rent your car for several years. Gap insurance could still be worth it for a leased car, and some leasing companies require this coverage to protect their investment.
If your leased car is totaled without gap insurance, you’ll owe the remaining payments on your lease. And after driving the car for a year or two, the leased car will depreciate in value just like a new car.
John bought a new $10,000 car using a car loan provided by his dealer. The terms of his loan states he needs to repay a total of $11,000 to the dealer after factoring in interest.
He insured the new car at market value with a comprehensive car insurance policy. The moment he drives it off the lot, his new car turns into a second-hand car worth only $9,000.
Soon after, John gets in an accident and totals his new car. Fortunately, he has collision car insurance. He makes a claim and gets reimbursed for the total market value of the car, which is $9,000. Now he has no car and still owes his car dealer $2,000.
John uses his car gap insurance to cover the $2,000 he needs to pay the remainder of his loan. His insurance pays off the full remainder of the loan. Now he can shop for a new car without any existing debt.
Gap insurance can keep you from paying an arm and a leg if you lose your car. To save money, make sure you compare the best rates with an online insurance comparison tool and avoid the expensive option from your car dealer.
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