If you plan to finance or lease a new car, you may want to think about buying gap insurance. Gap insurance covers the "gap" between the amount you still owe on your auto loan and your car’s actual cash value (ACV). The ACV is set by your carrier at the time of an auto accident that results in your car being totaled, or if your car is stolen.
In the end, you are still held responsible for making the rest of the loan or lease payments. While gap insurance is not required by law, it can relieve financial pressure if your car is totaled or stolen.
Learn more about gap insurance and how long you have to purchase the coverage after getting your new car.
Should You Buy Gap Insurance?
Gap insurance for new cars that are financed or leased can be bought from a few sources. These include the dealer, finance company, current insurance carrier, and online specialty companies.
Gap insurance is not to be confused with an extended warranty, which can be purchased for both new and used vehicles from dealers and online warranty providers. While there may be some gap insurance carriers that will insure a gently used car, it is important to review carrier guidelines and understand the role of depreciation in making your purchase.
There are three factors you should consider when deciding to add gap insurance to your vehicle: the amount of money you put down; the length of your loan/lease term; and the type of vehicle. These factors determine your need for gap insurance.
Gap insurance might be right for you if:
- You've put little money down.
- You have an extended loan/lease term.
- You have purchased a vehicle that depreciates quickly.
When Should You Buy Gap Insurance?
If you are thinking about getting gap insurance, keep in mind that you generally have to be the original loan or lease-holder on the vehicle. You should select the coverage shortly after making your new car purchase.
The first two or three years are when you are most likely to owe more than what insurance will pay for a total loss or theft of your vehicle. For that reason, if you want to buy gap insurance, you'll need to do it within the first few years of owning your car.
In some cases, the gap insurance may even expire after a certain number of years. That's because, at that point, your car will no longer be less than the loan or lease balance.
Buying From Your Lender
Your lender will likely offer gap insurance when you finance your new car; they may also offer an extended warranty. But this will likely be the most expensive option.
If you lease a vehicle, the financing company may require you to purchase gap insurance directly through them. But in many cases, you can find it elsewhere for a lower cost. Most major auto insurance carriers offer gap insurance. When you call to ask about the cost of insurance on the new car before buying, ask your agent about gap insurance options.
Buying From Your Car Insurance Company
Gap insurance through your car insurance company is often fairly priced. Spending an extra $10 to $20 per month is worth it if your car is ever totaled or stolen.
Each carrier has its own guidelines for gap insurance. Make a point to ask not only about gap insurance but also about other types of coverage. These could include "new car" replacement, "better car" replacement, and loan/lease payoff.
How Does It Compare to Loan/Lease Payoff Coverage?
Loan/lease payoff coverage is similar to gap insurance; the terms are often used interchangeably. It depends on the carrier. But in some cases, the loan/lease payoff coverage may be the same as gap coverage. You should always check with your agent to make sure there isn't a difference in coverage.
Some carriers that offer loan/lease payoff coverage only cover part of your car's ACV when totaled or stolen.
Ask your agent about all coverages available to you, such as new car replacement. Take the time to read and learn about the terms of those coverages. This can help you make the best choices when it comes to insuring your new car.