Do You Need Gap Insurance?

by Don Elliott on May 11, 2011

Gap insurance covers the difference between your vehicle’s actual cash value and your actual loan amount. In the event that you are in an accident and your car is totaled beyond any auto repair, it is possible that you could owe more on your loan than your insurance company will pay to settle your claim. This situation is more common than you might imagine.

There are three scenarios where you should purchase gap insurance.

Situation #1 – You discover that the amount that you borrowed to pay for the car you have just bought is more than your car insurance coverage will reimburse in the case of an accident. You may have paid a premium for a car that you really wanted or you may have rolled the balance owed from your trade-in into the financing for the car you just bought. Also, if you don’t have any down payment money or if your credit in not good, it might be necessary to pay more for your vehicle to compensate for a less than adequate financial situation. Determining the coverage reimbursement with your car insurance agent before you sign the paperwork is always a good idea.

Situation #2 – Buying a new car has many advantages. However, the minute that you drive your new car out of the new car dealership, it incurs its largest depreciation. Depending on the make and model purchased, the amount of money down, trade-in value, term of the financing and the manufacturer’s incentives, it is very likely that your new car purchase will be “upside down” for a while (this car industry term means that you owe more than the vehicle is worth in the open market). Usually, the used car value of your new car will catch up with financing in 24 months or less. Gap insurance can provide protection until the financing catches up. If your gap insurance is part of your collision and comprehensive policy, follow up periodically to determine when it is no longer necessary.

Situation #3 – Some new and used car leases actually require gap insurance as part of the lease agreement. Sometimes it is necessary to pay off a lease ahead of the lease termination because of theft or an accident.  In this situation, the payoff (residual value plus remaining lease payments less interest on the remaining lease payments), could easily exceed the value of the reimbursement offered by the car insurance company.

It pays to shop for your gap insurance. Dealerships offer gap insurance as a matter of convenience and as a profit center. Payment at the dealership is a one time payment. There are plenty of online insurance companies offering a wide array of coverage choices. Most automobile insurance providers offer gap insurance as part of their services and may have already include gap coverage as part of your insurance policy.

If you pay cash or make a significant down payment, you DO NOT need gap insurance.

Send us a comment if this information on gap insurance has been helpful.

 

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