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Auto insurance is a necessity if you want to drive worry-free. You may also need gap insurance in addition to your standard liability and collision coverage. "Guaranteed auto protection" is referred to as "Gap" in the insurance industry.

The type of car you buy or lease can impact whether or not you need car gap insurance. Is gap insurance, on the other hand, a good investment? Consider whether or not it's a good idea to buy collision insurance instead of comprehensive insurance if you have a lot of debt on your car.

What is Gap insurance?

Gap insurance covers the difference between what a total loss compensates the insured for and what the insured still owes on the car's financing, or lease agreement is known as gap insurance. This occurs when the outstanding balance on a car loan exceeds the car's book value.


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This type of insurance covers the difference between the insured value of a vehicle and the remaining loan or lease balance that the owner is responsible for repaying. Gap insurance covers the difference between your auto insurance payout and the amount you still owe on the vehicle if it is totaled or stolen before the loan is paid off.

Certain car, truck, and SUV models may require gap insurance if you plan to finance your purchase. For example, luxury sedans, SUVs, and certain sports utility vehicles may depreciate and lose value more quickly than usual.

How does gap insurance work?

In the early years of owning a car, it's easy to owe the lender or leasing company more money than the vehicle is worth. A small down payment and a long loan or lease period will suffice, at least until your monthly payments add up to enough equity in the vehicle to warrant ownership.

The equity must be equal to the current value of the car when filing claims and valuing vehicles. If your car is totaled, your regular insurance will only pay out that amount, not the one you paid for it. The issue is that, for the first couple of years after purchase, automobiles lose value rapidly. In fact, within the first month of ownership, the average car loses 10% of its value.

If your car is totaled, your insurance policy won't cover the cost of buying a new one to replace it. You'll be paid what a comparable car on a used-car lot would fetch. This is what car insurers refer to as the car's actual cash value.

That particular chasm isn't covered by gap insurance. As a result, your financial losses will be kept to a minimum because payouts are based on actual cash value rather than replacement value.

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Gap insurance at work

Consider Mr. Reese's car, which has a value of $18000, as an example of gap insurance at work. Mr. Reese's car insurance policy will reimburse him $18000 if his car is wrecked in an accident or stolen. However, he is still liable for $21000 in-car payments that he has not made. Mr. Reese owes $21000 to the auto finance company means that even though he no longer has a car, he will still be $3,000 in debt.

Cheapest Companies For Gap Insurance

Insurance Company Monthly Quote for Gap Insurance
Amigo USA $164
Kemper $166
Travelers $198
Nationwide $217
Elephant $224
Clearcover $225
Safeco $236
Dairyland $322
Bristol West $327
AssuranceAmerica $329
The General $384
Infinity $461

When do you need to go for gap insurance?

You took out a loan to buy a car and put down only a small deposit: You'll be in financial trouble as soon as you drive your car off the lot if you don't put down a sizable deposit. Even when the loan and car's actual value are equal, it may be years before they are.

In exchange for your upside-down car, here's what you got: If you buy a new car after trading in your old one and you still owe money on it, the dealership will add the difference to the loan balance on the new one. If your car is totaled or stolen, the extra balance you have could come back to haunt you.

This car you purchased has poor profit potential when it comes time to sell. If you bought a car that quickly depreciates, you'd be in trouble if you didn't put down a significant amount of money. Consider that when we say "substantial," we mean at least 25%.

You want to rack up the miles as quickly as possible. Driving a lot devalues a car much faster than anything else. Your car's value diminishes faster as you rack up the miles, so you may find yourself losing money on it faster than you can make the payments on it.

Long-term car loans (over 60 months) are in your future. When you reach the break-even point on a long-term loan, your loan balance and the car's value are no longer equal.

When does gap insurance make sense?

If you're buying a new car or truck, we at Way.com would recommend you to look into gap insurance, especially if you're considering:

Insurance for the gap can shield you from the financial ramifications of having your car declared a total loss. To cancel gap insurance, you must owe less than the vehicle's book value. If you have gap insurance, keep an eye on your loan balance.

You almost certainly have collision coverage if you're still making payments on your car. You'd be playing with fire if you didn't have collision coverage, and your loan or lease agreement probably requires it anyway.

You put at least 20% down on the car when you bought it, so even after a year or two. You are unlikely to be in default on your loan. After fewer than five years, you've paid off your car loan. The car is a well-known brand and model with a long history of retaining its value.

If you're curious about how much your car is worth, make sure you keep an eye on several sources. Consider how much you still owe on your loan. No more worrying about the loan-to-value gap if your loan balance is less than the value of your car.

Cost of getting gap insurance

For as little as $20 a year, you may add gap insurance to your usual comprehensive auto insurance coverage. However, your cost will vary depending on the common insurance laws. That is, your state, age, driving record, and the car model all go into the price.

It is usually priced at 5% to 6% of the collision and comprehensive premiums on your auto insurance policy by a major insurer.

For example, if you pay $1200 per year for both coverages, gap insurance will cost you only $50 to $60 extra each year to safeguard your loan.

Getting gap coverage from an insurer is usually less expensive than getting it from a dealer or a lender. Before you drive off the lot, the auto dealer is likely to try to sell you gap insurance. Some are even compelled by state law to provide it.

Dealers, on the other hand, frequently charge significantly more than the major insurance firms. A dealer will charge you a set premium of $500 to $700 for a gap policy on average.

Gap insurance can be added to your existing auto insurance policy by several insurers. As a result, it's a good idea to shop around a little, beginning with your existing auto insurer. Another benefit of going with a big-name carrier is that it's simple to get rid of gap coverage once it's no longer necessary.

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Advantages of getting gap insurance

These days, buying a new car is a costly prospect. The average loan for a new car is more than $33,000. Currently, the average loan period is 69 months.

Even if your lender authorized it, you wouldn't consider skipping collision insurance on that car. However, you might want to consider gap insurance to complement your collision insurance for the time that you owe more on the automobile than it is worth. If the automobile is totaled, your collision insurance policy will pay out that amount.

Is the value of your car currently less than the loan balance? This is particularly frequent in the first few years of ownership, especially if you put down less than 20% and extended the loan repayment term to five years or more. If that's the case, you'll require gap insurance.

What you understood from the paper:

Auto Insurance Data Methodology

The auto insurance rates published in this guide are based on the results of research completed by Way.com’s data team. Using a mix of public and internal data, we analyzed millions of rate averages across U.S. ZIP codes.

Quotes are typically based on a full coverage policy average unless otherwise noted within the content.

These rates were publicly sourced from insurer filings and should be used for comparative purposes only — your own quotes will differ. Given this, it’s important to go through our insurance steps form to find how much you can save with way.com

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