What is Gap Insurance and Do You Need It?

If you buy a new car, it starts to depreciate as soon as you drive it from the parking lot, about 10 percent of the original value within one year. And that’s just an approximation; some can depreciate as much as 50 percent if it’s not a very popular car.

If your new car is in an accident or is badly damaged, your standard insurance will pay the current value at the time of claim. This can be a problem, and in some circumstances the loan you take out to buy a car can exceed the actual market value of the car or truck.

Your standard car insurance policy will only pay what your car is currently worth and if you still owe more than the current value amount, this could be a problem. Your finance company wants you to pay off the total of your loan immediately.

This is where gap insurance comes in handy. Gap insurance covers the difference between the current value of the vehicle and the amount you still owe.

Should You Get Gap Insurance?

Gap insurance is most needed in certain circumstances. That Insurance Information Institute (III) recommend gap insurance when:

  • This loan is financed for 60 months or more
  • Down payment less than 20 percent
  • The car is rented
  • It is a vehicle that depreciates faster
  • New loan includes negative equity rolled over from previous car loan
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GAP Insurance for Rent

GAP insurance is very important when renting a vehicle. In fact, leasing companies need it. Standard car insurance will pay for the current value of the car after an accident that renders your car undrinkable, but not the total amount you owe. GAP coverage ensures that you’ll be protected against the value of the car when it’s new so you’re not stuck with ongoing rental payments.

Two points to remember:

  • Usually, GAP insurance is included in your rental contract, but if not, you’ll have to shop around for coverage.
  • Sometimes rental contracts will include a GAP waiver, which means you’re covered if the car suffers a total loss. If you have it in your contract, you don’t have an actual GAP policy.
  • Rental contracts usually require you to have comprehensive collision and coverage.

GAP Insurance for Loans

Whether or not you need GAP insurance when you have a car purchase financed depends on several factors including:

  • You’re not paying a big down payment – ​​Generally, a down payment for a car is less than 20 percent, the GAP should be considered. This is especially relevant if your car is depreciating quickly.
  • You have covered your comprehensive auto insurance policy – ​​If your policy states that it will pay off the full amount financed, you do not need GAP insurance.

How to Buy Gap Insurance

Gap insurance is optional and separate from your standard policy. States differ in their gap insurance rules. Some states require you to get one, and loan lenders often do, too. Car dealers are sometimes required to offer gap insurance.

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If you buy gap insurance through an auto dealer, you will probably pay more than if you bought it from your insurance company at the same time you bought your primary policy. Typically, adding gap insurance on top of collision and comprehensive coverage only costs about $20 more per year (I, I, I).

Check out the auto insurance options offered on einsurance.com, where you can also compare offers. Be sure to ask about gap insurance if you believe it’s a good way for you.

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