When you’re financing a car, you might think you’re fully covered with just your regular auto insurance policy. However, if you owe more on your car loan than your car is actually worth, there’s a financial gap that could leave you in trouble if your car is stolen or totaled. This is where gap insurance comes in.
In this article, we’ll explain what gap insurance is, why it’s important, and whether or not it’s the right choice for you.
What is Gap Insurance?
Gap insurance, or Guaranteed Asset Protection insurance, is a type of coverage that helps protect you from a potential financial gap between the amount you owe on your car loan and the amount your car is worth at the time of a total loss. Typically, the longer you’ve had your car, the more its value depreciates, which can create a gap between the loan balance and the actual value of the vehicle.
For example, let’s say you’ve been making payments on your car for a few months, but due to depreciation, your car’s value has dropped. If you were to get into an accident and your car is totaled, your standard car insurance will only pay you the market value of the vehicle, which is likely to be less than what you owe on your loan. Gap insurance would cover that difference, helping you avoid paying out-of-pocket to cover the loan balance.
Why Might You Need Gap Insurance?
New Cars Depreciate Quickly
When you drive a new car off the lot, it starts losing value immediately. Within the first few years, your car may lose 20% or more of its value. If your car is totaled early in your loan term, gap insurance ensures that you’re not left paying a large sum for a vehicle you no longer own.
You Have a Small Down Payment
If you made a small down payment on your car when you financed it, you might owe more than the car’s worth from the start. Gap insurance can protect you in this scenario, especially if the value of the car decreases faster than your loan balance is paid down.
You Have a Long Loan Term
Many people are now opting for longer car loan terms, such as 72 or 84 months. While this can lower your monthly payments, it also means you’ll be paying off the loan for a longer period. During the early years of a long loan term, your car’s value may depreciate faster than your loan balance decreases, leaving you with a gap in the event of a total loss.
Leasing a Car
If you lease your car, you could be in a similar situation. At the end of the lease, you may owe more than the car’s value, especially if the car has depreciated faster than expected. Gap insurance can be a good idea for leased vehicles to cover the difference between what you owe and what the car is worth at the time of the accident.
How Does Gap Insurance Work?
Gap insurance typically works in the following way:
If your car is stolen or totaled, your standard insurance policy will pay the current market value of the vehicle.
However, if the amount you owe on your car loan is higher than what your car is worth, gap insurance will cover that difference, leaving you with no further debt to repay on the loan.
It’s important to note that gap insurance only covers the difference between your loan balance and the car’s value. It doesn’t cover any additional damages to the car or any other personal belongings inside.
Do You Need Gap Insurance?
While gap insurance is a great safeguard in certain situations, it’s not always necessary for everyone. Here are some factors to consider before deciding if gap insurance is right for you:
How much do you owe on your car? If your car loan balance is already less than the market value of the car, gap insurance may not be needed.
How long have you had the car? If you’ve owned the car for a while and it’s no longer depreciating quickly, you might not need gap insurance.
What kind of insurance do you already have? Check your current car insurance policy to see if you’re already covered for any potential gaps.
Gap insurance is a relatively small cost to add to your policy, especially if it gives you peace of mind knowing you’re financially protected if the worst happens.
Is Gap Insurance Worth It?
In short, gap insurance is worth considering if:
You’re purchasing a new car.
You have a small down payment or a long loan term.
You are leasing a car or owe more than your vehicle is worth.
It’s always a good idea to evaluate your specific situation and talk to your insurance provider about whether gap insurance is the right choice for you.
