The issue of gap insurance coverage in the car insurance industry is highly misunderstood, especially by new drivers. The thing is that, acquiring a new car is a significant investment, and many drivers wind up paying off their lease or auto loan over several years. However, a new car’s value can decrease dramatically over time, particularly in the 1st year. A full coverage auto insurance policy only pays out up to the car’s current market value if your new automobile gets totaled in an accident.
If you are still owing your auto loan, then your auto insurance will pay for it, how can you pay it off? Unfortunately, unless you have gap insurance, you’re still responsible for paying the difference between the value of the car and the amount you owe on it. However, if your car is deemed a total loss in those circumstances, gap coverage can prevent your account from being depleted.
We are going to take a closer look at gap insurance and its entirety in this article. We are also going to look at car insurance with gap coverage and who needs to buy one.
What is Gap Insurance Coverage?
Gap insurance, also known as loan/lease gap insurance or guarantee asset protection, is intended for those who finance or lease their automobiles. It will pay the discrepancy (or “gap”) between your car’s real worth (not the price you paid) and any unpaid lease/loan balance if it is stolen or totaled. Consider that you have a $25,000 auto loan.
The vehicle gets involved in an accident a few months after being purchased, and the adjuster from the insurance company labels it a total loss. Your collision or comprehensive insurance (usually required when leasing or financing a vehicle) will pay for the loss depending on the type of damage, such as a highway fender-bender or a falling tree branch.
Your car’s true cash value, according to the insurance adjuster, is $20,000, but the remaining loan is $24,000. This situation is known as being “underwater,” when you owe more than your car is worth. You are still liable for paying the entire loan even after your car is totaled. The additional $4,000 that you typically find yourself paying out of pocket would be covered by a gap auto insurance coverage.
When to Use Gap Insurance
- When you buy a car on credit with little to no down payment: You’ll be in default on your auto loan as soon as you drive out of the lot if you don’t put down a sizable down payment. Before the loan balance and the actual worth of your car starts to balance, it could take a while.
- When you traded in an automobile that was upside down: If you don’t pay the difference in full upfront when you trade in an upside-down vehicle, the dealership will add the remaining debt to the loan on the new vehicle. If the vehicle is wrecked or stolen, this additional balance can come back to bite you.
- When you purchased a vehicle with a low resale value: Without a sizable or substantial down payment, you would be upside down if you purchased a car that depreciates quickly. When we say “substantial,” we mean at least 25%.
- When you want to accumulate miles quickly: Few things lower a car’s value more quickly than frequent driving. The value of your automobile depreciates more quickly the more miles you put on it, and this may happen faster than your payments may keep up.
- When you obtain a loan for a vehicle with a lengthy term (greater than 60 months): The break-even point, or the moment at which the balance of your loan and the value of your car start to equalize, is reached more slowly with a long-term loan.
A Case Study on the Benefits of Gap Insurance
- The remaining car loan balance of $20,000
- The actual cost of the vehicle was $17,000
- Collision or comprehensive deductible of $500
- The insurance provider reimburses the lender $16,500
- What you still owe the lender in full absent gap insurance of $3,500
If you don’t have gap insurance coverage and the remaining debt on your car loan or lease is higher than the worth of your car, you will be liable for paying your loan yourself. You may be required to have gap insurance by some leasing firms or lenders. It aids in defending them against car owners who decide not to repay a lease or loan if the vehicle is totaled or stolen.
You might be covered by some gap insurance plans for the entire loan balance, even if negative equity has been incorporated into your new vehicle loan. If you trade in a car, for instance, and you have debt more than your car is worth, the difference is incorporated into your new lease or loan. If you incorporated negative equity in your new vehicle loan, be careful to choose a policy that does not as every gap insurance product will.
What Does Gap Insurance Cover?
Whether a total loss is the consequence of an auto theft or accident, gap insurance pays the remaining balance on the vehicle. When you purchase or lease a new vehicle, comprehensive collision coverage is often necessary. Gap insurance pays out after these two coverage kinds. (They cover damage to your car following incidents like collisions, fires, and vehicle theft). However, collision and comprehensive insurance only cover the value of the car in case of an accident or theft. Therefore, gap insurance settles the difference when you are owing more than that on your auto loan or lease.
Who is Gap Insurance Good for?
If you lend or lease your car, you might want to think about getting gap insurance. If your car is totaled, doing this may help you avoid suffering a substantial loss. Additionally, it might assist you in fulfilling any insurance requirements set forth by your lender or lessor.
In general, you should consider gap coverage if you:
- Finance your new vehicle for at least 60 months
- Purchase a car with a little more than 20% down payment
- Purchase a car that will lose value soon (such as some
- sports cars or luxury cars)
- Plan to drive your car a lot because doing so will hasten depreciation
- Want to transfer the remaining balance on your old car loan to your new one?
Who is Gap Insurance Not Good for?
There are few circumstances where gap coverage may not be a good idea. There won’t be a difference between the value of the car and the amount you owe the lender if you own the car outright. If the vehicle is totaled, you will receive the assessed value less your deductible as opposed to a lending company receiving it. If you borrow money but also put down a sizable amount of money, gap insurance might not be necessary.
Your loan amount will depend on the value of your down payment, and a lesser loan will result in a smaller or nonexistent gap. Keep in mind that the correlation between your remaining loan and the market value of your car is always shifting. Even though your car will lose value over time, you will still be making consistent payments that lower your loan balance. As a result, it’s crucial to keep an eye on your remaining loan and actual automobile worth to decide whether you still need gap insurance.
Where to Buy Gap Coverage
Gap insurance can be obtained from car insurance companies. It’s an excellent choice to get gap insurance from a car insurance company, but you should always compare automobile insurance providers because gap insurance is frequently less expensive when bought through an insurer.
Insurance Companies That Offer Gap Coverage
Many auto insurance providers provide gap insurance coverage, including:
- Allstate
- American Family
- Erie
- Progressive
- Nationwide
- Shelter
- Travelers
- State Auto
Gap insurance is not offered by all auto insurance companies, and it cannot be accessible in all states. For instance, gap cover insurance is not offered by Geico or Farmers.
Gap insurance can also be offered by other sources like:
- Auto dealers
- Credit unions and Banks
What to Look at When Buying Gap Insurance
When making a purchase, you have two options for gap insurance. The dealership or your auto insurance provider. As mentioned above, this kind of insurance is also sold by some credit unions and banks. Gap insurance may be incorporated in your finance agreement (which is frequently the case for leasing) or optionally during purchase. Dealerships normally charge a set fee of $400-$700 for gap insurance, however, prices might vary.
Cost of Gap Insurance
As opposed to a car dealership, gap insurance is far less expensive than an auto insurance company. Although it might seem easier to purchase gap insurance from an automobile dealership, doing so is frequently more expensive overall.
The Average Annual Cost of Gap Insurance
| Company | Average annual cost of gap insurance |
| Shelter | $141 |
| Erie | $58 |
| State Auto | $52 |
| American Family | $51 |
| Auto-Owners Insurance | $48 |
| Progressive | $38 |
| Travelers | $34 |
| Average | $60 |
Conclusion
Having gap insurance coverage on your car is not obligatory, it is optional. But having it is a good idea. It can assist you pay off the car loan in the case where your car is stolen, or you owe more than the car depreciation value. Additionally, it can help you to pay off the gap between what you are owing on the car and the value (depreciated value) of your vehicle. But gap insurance is only issued to the original owner of the car.
