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Gap insurance, also called guaranteed asset protection, protects your car loan or lease if your car is totaled or stolen while you’re making payments. The good news is that you can buy gap coverage for only a few bucks a month — as long as you don’t buy it from your car dealer.
Gap insurance protects you for the amount, or gap, left on your loan if your car is stolen or totaled in an accident. Some lenders require you to buy gap insurance, but check your loan contract to make sure. You can add gap insurance to your policy at any time, even after taking out your loan.
When financing a new car, you’re paying for a car that depreciates the minute you drive off the lot — all while chipping away monthly at your interest-gaining car loan. As a result, your car’s value can fall quickly below the amount you owe on your loan.
Since insurance only pays out your car’s market value if it gets totaled, you could be left paying off the rest of your car loan yourself with no car to show for it.
New cars depreciate around 20% within a year of buying them, according to the Insurance Information Institute. Even though you might have a $40,000 auto loan, your new car’s actual cash value might be only $32,000 after driving off the lot.
If your car is stolen, you’d owe $8,000 on your loan, not including interest: $40,000 (original loan amount) – $32,000 (your car’s actual cash value) = $8,000.
Gap insurance pays off that extra $8,000 left on your loan. That means you’re getting thousands of dollars worth of protection for a mere $20 a year.
No. Gap insurance only pays for a totaled or stolen car if there’s a gap between what your car’s worth and what you owe on your loan.
If your car’s insurance payout is the same as what it’s worth, there won’t be a gap between your loan balance and insurance payout — so gap coverage doesn’t need to kick in.
Along with that, the standard car insurance exclusions apply to the claim. For example, if you damage your car intentionally, your claim would be denied.
When getting a car lease, you make a small down payment and pay monthly to rent your car for several years. Gap insurance is probably worth buying for a leased car, and some leasing companies require it 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 would.
The biggest benefit to gap insurance is that it covers you if you owe more money on your car loan than your car is worth.
Consider buying gap insurance if:
You won’t need gap insurance if:
You can check your car’s depreciation by price-checking online for an older model of the car you’re looking to buy. If the market price is vastly different from the new car price, your car’s depreciation will be high.
Keep in mind that new cars depreciate in value faster than older cars, so you may want to check on your specific car’s value to decide whether you need gap insurance.
Gap insurance costs about $20 a year or under $2 a month as an add-on to your car insurance policy, according to the III. You could pay $60 to $120 total if you keep it for three to six years while paying down your loan. Nearly every car insurer lets you buy gap coverage with a full coverage policy, which has both comprehensive and collision coverage. You’ll need both types of coverage for your car loan anyway.
Alternatively, buying gap coverage from a car dealership, bank or credit union can cost anywhere from $200 to $600 total, Edmunds reveals.
So, you’ll get the best deal on gap insurance as an add-on to your car insurance. Because it’s the same level of coverage as you’d get through insurance, there’s no reason to get gap coverage through your dealer or bank. And don’t let your dealer convince you that gap coverage is necessary to drive off the lot or for loan approval.
Dennis Sawan
Managing partner of Sawan & Sawan
A general auto insurance policy is designed to pay the lender the vehicle’s current cash value — not the current loan balance. The difference can be thousands of dollars. The average new vehicle loses 30% of its value the first year. By year three, that loss in value will be close to 50%. This is where gap insurance can help.
Consider this example: If your vehicle cost $25,000 new, your insurer would probably pay about $18,000 for a total loss during the first year. That’s a $7,000 shortfall. Depending on the amount of your down payment (or trade-in equity), you would still be responsible to your lender for the balance of the loan. If you have car gap insurance, your insurer pays the difference, not you.
While there is no one-size-fits-all answer regarding the need for gap insurance, you’re a likely candidate if you:
- Lease a vehicle.
- Finance for 60 months or more.
- Put less than 20% down.
- Roll negative equity from a previous vehicle loan into a new vehicle loan.
- Drive more than the average 15,000 miles annually.
- Purchase a vehicle with a history of high depreciation rates.
Keep your eyes open to these pitfalls when buying gap insurance.
Gap insurance can keep you from still having to pay your car loan if your insurance claim doesn’t cover the full amount of your vehicle. Compare the best rates with an online insurance comparison tool and avoid the expensive option from your car dealer.
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