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Why you may need Gap Insurance

ing a new car is an exciting adventure, although confusing at times. Settling on the car you want to buy is the fun part. However, there are other requirements like car insurance that are mandatory in most States. Without the right information and no research done, the whole process can be overwhelming, and most people would rather avoid everything altogether.

Car insurance offers financial protection in case your vehicle is involved in an accident or stolen. Insurance companies offer auto insurance coverage, and one such product is gap insurance.

What is gap insurance?

Unlike auto insurance, which is mandatory, gap insurance, also known as guaranteed auto protection, is an additional auto policy that is supplementary and covers the car's depreciated value against the balance owed on the car loan. In other words, it is the amount of money that you owe on your loan less the insured value of your car. For example, if your car is stolen and you have not finished paying the car loan, gap insurance pays the difference between the regular auto insurance amount and the money still owed on the car.

Although gap insurance is supplementary, some lenders require you to take the insurance for specific cars. It is mostly on vehicles that depreciate very fast. Car dealers will offer gap insurance when you buy the car, although you may choose to get it elsewhere. You have the option of shopping around and comparing quotes before settling on a provider for your gap coverage.

Why do I need gap insurance?

Gap insurance is necessary if you purchase a new car through financing or leasing. Some lenders require you to carry collision,  comprehensive,  and gap insurance. 

  • The car you have purchased loses value very fast. 

  • Your down payment for the car was below 20%

  • The car is leased, and therefore it is a requirement to carry gap insurance by the lender.

  • The car loan is paid in more than 60 months.

Gap insurance policy is essential if your car which is still on financing, is involved in an accident and becomes a total write-off, or is stolen. The coverage can help cushion you from massive financial losses.

How gap insurance works

Gap insurance covers the balance you have on a loan or lease. Since a car depreciates by up to 10% in a few weeks of purchase, it is possible to owe the lender more money than the actual value of your car.  If you add on to the small amount of the loan down payment stretched over the years in monthly installments. 

Consider this example

You buy yourself a new car for $25,000 and pay a down payment of 20%. Which means you still owe the lender $20,000. If you get involved in an accident, your comprehensive coverage pays the lender the car's depreciated value, which might be $18000.  It means you have $2000 to pay your lender. Gap insurance is important since it covers the value difference and pays the $2000 on your behalf. However, without gap insurance, you will have to pay out-of-pocket.

Where can I get gap insurance?

Car dealers sell gap insurance, and in some states, they are required by law to offer it to you. However, it is good to know that the charges are significantly higher than those offered by insurance companies. It is important to shop around and get the best gap insurance quotes that work for you.

You can buy gap insurance after buying your car. Insurance companies require the purchase of gap insurance on a brand new car as a requirement. It means you own the vehicle, and the lease or loan has your name. Additionally, the vehicle should be new and not less than 2- 3 car models.

The upside of getting gap insurance is that it offers additional coverage to your collision coverage for any amount you owe that is more than the car's actual value. Buying a good car is expensive, and it is wise to protect yourself from financial ruin by getting the coverage needed for your car.

Cost of Gap insurance

According to the Insurance Industry Institute, you can add gap insurance to your comprehensive car insurance for as little as $20 a year. 

It is cheaper to opt for an insurance provider compared to going through a car dealer. It will save you some money for other expenses.

However, it is important to note that the cost of gap insurance varies depending on your location, type of vehicle, age, and driving record.

Most insurance companies offer gap insurance added as a percentage amount to your collision or comprehensive auto insurance coverage.

To buy or not to buy Gap insurance

Gap insurance is necessary if you are purchasing a brand new car through financing or leasing. Also, with the ever-increasing car prices, car dealers are offering incentives to purchase a new car with reasonably low down payment options. If you are shopping for a new car, gap insurance will offer additional coverage, providing you with peace of mind as you enjoy your new car.

Lastly, consider how much money you owe on your loan against the actual value of the car. Check Kelley Blue Book to get an estimate for your car. If the value of the car is less than the loan, you no longer need to pay for gap insurance.

The choice to buy gap insurance depends on your lender and the type of car you want to purchase. Gap insurance is much needed since events can change very fast on the road. You may be the best driver with a good record. However, we are not privy to other motorist driving habits. An accident can happen without your fault, or your car can be stolen. Since no one knows what tomorrow brings, it’s easier to control whatever is within our means. Gap insurance can be the life line much needed in the event your car has an accident or is stolen. It is the difference between getting full compensation or breaking your bank.