If you’ve wondered what gap insurance is, you could read all about it here. However, do you know how it works and what it covers? Read on to find out
Gap insurance is a type of car insurance coverage that vehicle owners can buy to protect themselves from losses that can occur when the compensation received from a total loss does not entirely cover the amount owed on the car’s finance or lease agreement. This situation occurs when the outstanding debt on a car loan exceeds the car’s book value.
What is gap insurance?
If your car is totaled or stolen, and you owe more than the car’s depreciated worth, gap coverage might help you pay down your loan.
“Loan/lease gap coverage” is another name for gap insurance coverage. Only the original loan or leaseholder on a new car is eligible for this type of coverage.
Gap insurance bridges the gap between your car’s depreciated value and the amount you still owe on it.
How does gap insurance work?
Consider you financed a new car worth $20,000. You now owe the lender a total of $25,000 towards your car payments. This includes the interest you must pay. In the unfortunate event that your car is written off or declared a total loss as a consequence of a collision or theft, your insurance provider will pay an amount, say $18,000. After factoring in depreciation and the limits of your car insurance policy.
Although you no longer have a car, you still owe the lender $7,000 towards car payments. This is where gap insurance comes into effect. If you have gap insurance, your insurance provider will pay this $7,000 “gap” to the lender. They’ll help you close the loan or lease.
What does gap insurance cover?
Many lenders need collision and comprehensive coverage on your car insurance policy until your car is paid off if you’re leasing or financing a new car. Gap insurance is intended to be used with collision and comprehensive insurance. Your collision or comprehensive coverage will help pay for your totaled or stolen vehicle up to its depreciated worth if you have a covered claim.
When you drive a brand-new car off the lot, its value drops immediately. In addition, the value of most automobiles depreciates by roughly 20% in the first year of ownership. But what if your loan or lease balance is still higher than the car’s depreciated value? That’s where gap insurance can come in handy.
How to get gap insurance?
The easiest way to get gap insurance is to buy it at the dealership when you buy or lease a car. They’ll probably offer gap insurance coverage when you’re sitting in the finance person’s office, surrounded by reams of paper. If you wish to add this coverage, request that it be paid in full rather than being rolled into your monthly car payment, where the lender can earn interest. Through dealership finance, the cost is normally around $400 to $600.
You can buy gap insurance can be obtained at any time. You don’t have to buy it from the dealer. Check with your current insurance provider to see if you can add this coverage to your current policy. It normally costs around $20 per year, and you won’t need it indefinitely. You’ll only need it for as long as your auto loan is underwater.
When you get a car loan from a bank or credit union, they usually include gap insurance as well. Some credit unions provide it for as little as $200. Set up gap insurance with your insurance provider, bank, or credit union ahead of time if you get it outside of the dealership. As soon as you get behind the wheel in the dealership parking lot and start driving, you’ll be covered.
How much is gap insurance?
Gap insurance is available from your auto insurance company, loan provider, or dealership. When purchased from a dealership, gap insurance costs between $400 and $700 per year, and when added to a car insurance policy, it costs between $20 and $40 per year.
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Is gap insurance worth it?
Is gap insurance worth it? You may still be wondering. In the appropriate circumstances, it surely could be. Gap insurance kicks in if your car is destroyed, such as by theft or a covered accident, and your car is declared a “total loss.”
While you may be a cautious, responsible driver, you are not the only one on the road. If you are “upside-down” on your car loan, not having gap insurance could result in you being reimbursed for thousands less in the event of a total loss. Do you want to take a chance on the gap insurance? Find out if gap insurance is perfect for you and get a free quote right now.
Gap insurance may appear to be just another method for insurance firms to get into your pocket, but it makes sense if you’ve leased or financed your car. If the worst happens and the car is totaled in the first few years you own it, you still save thousands of dollars. And avoid a lot of pain by paying a little extra at the start of your loan.
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