What is Gap Insurance?
Question: What is Gap Insurance?
Gap insurance is critical for some buyers. While at the same time, it can be a waste of money for others. Do not let a car salesman or insurance agent pressure you into buying gap insurance without first knowing exactly what it is.
Gap insurance protects against the depreciation loss of a vehicle versus what is owed. For instance, imagine taking out an extended 6-year loan on a car.
A total loss accident a year after purchase would leave you owing more than it's worth because most of the payments over the last year went straight to interest.
How it Works
- Standard car insurance does not pay what you owe on a car.
- Car insurance typically pays actual cash value, ACV, unless specified otherwise.
- Gap insurance is the coverage that will pay the gap between what the car is worth and what you owe.
Gap insurance often comes down to the financial stability of the purchaser. Negotiations with the lender can fall short when you have bad credit or no credit. The worse the loan terms are; the more likely gap insurance is needed.
Gap Insurance is Recommended
- Extended car loans, loan length 5 or more years
- Extremely high interest rate on car loan
- New vehicle purchase with a low down payment
- Leasing a vehicle
A total loss car accident leaves you with the possibility of owing more than what the vehicle is worth; especially if any of the examples listed above is the case.
It's hard to believe, driving a new vehicle off the car lot can depreciate a vehicle, but new cars are notorious for just that. A serious accident or theft of a new car shortly after purchase can put you in the position of owing more than it's worth. If you don't have the cash to cover the difference, gap insurance is your answer.
On the other hand, some people have no use for gap insurance. If any of the following examples apply to you, gap insurance is not necessary.
Gap Insurance Not Recommended
- Large down payment on car purchase
- Awesome deal on car price
- Short term car loan, 3 years or less
- Paid in full car purchase
The less you owe on your vehicle the better. Obviously, if you don't have a car loan, you do not need gap insurance. Just remember to cancel the coverage once you owe less than the value of the car. Keep up with the value of your vehicle with Kelly Blue Book. In face of a total loss, the last thing you'll want to deal with is a car payment when you can't even drive your car. Be prepared and get gap insurance if you are at risk of owing a higher amount than the current value of the vehicle.