To be financially secured while on the road, you must have car insurance. Gap insurance may be required in addition to liability and collision coverage. "Guaranteed auto protection" is a term used in the insurance industry.
The sort of vehicle you buy or lease will determine whether you require gap insurance. Is it, nevertheless, worthwhile to invest in gap insurance? If you believe you owe more money on a vehicle than your comprehensive auto insurance coverage would payout if you filed a claim, it could be the case.
Gap Insurance on a Car: What Is It and Why Do You Need It?
Gap insurance is a type of additional auto insurance that pays the gap between the insured value of a vehicle and the amount owed on a loan or lease. Gap insurance will cover the difference between your auto insurance payout and the amount you owe on the vehicle if your vehicle is totalled or stolen before the loan on it is paid off.
If you're getting a loan for a car, truck, or SUV, your lender might require gap insurance. This includes automobiles such as premium sedans or SUVs, as well as certain types of sports utility vehicles, that may degrade and lose value at a higher rate than usual.
The Basics of Gap Coverage
In the early years of a vehicle's life, it's relatively easy for a driver to owe the lender or leasing company more than the vehicle is worth. At least until your monthly payments add up to sufficient equity in the car, a small down payment and a long loan or lease time will suffice.
Equity must equal the current worth of the car for filing claims and determining vehicle appraisals. If the automobile is totalled, your regular insurance will reimburse you for that amount, not the price you bought. Cars depreciate rapidly during their first few years on the road, which is an issue. Just one month after purchase, the average automobile loses 10% of its value.
If your car is totalled, your insurance won't cover the purchase of a replacement car. You'll receive a check for the value of a car similar to yours on a used-car lot. The actual cash worth of a car is what insurers call it.
This particular gap is not covered by gap insurance. The reimbursements are calculated based on actual cash worth rather than replacement value, which can assist you to avoid financial hardship.
Is Gap Coverage Necessary?
You've probably heard the term "upside-down" about a mortgage obligation. Whether the financed object is a house or an automobile, the premise is the same: the financed item is currently worth less than the loan total.
It's not as bad as it appears. You don't own much of a house or car-free and clear if you merely put down a tiny deposit and pay the remainder in little monthly instalments over a period of five years or more. Your ownership portion grows as you pay down the principle, while your debt decreases.
Gap insurance, at the very least, protects you from being liable if the car is totalled.
If you have a car loan, gap insurance can be a good idea.
According to the Insurance Information Institute, gap insurance may be a smart option if you:
1. You didn't put down more than 20% for the house.
2. 60-month or longer-term financing
3. Vehicle was rented (carrying gap insurance is generally required for a lease)
4. Have you bought a car that depreciates more quickly than a normal car?
5. Negative equity from a previous car loan was transferred to the new one.
If the vehicle is declared a total loss in certain circumstances, gap insurance may be able to shield you from potentially serious financial implications.
Car Gap Insurance Benefits and Drawbacks:
These days, purchasing a new car is a costly endeavour. The average amount borrowed for a new car is more than $32,000. 69 months is now the average loan length.
How Can I Get Gap Insurance?
Ask your auto insurance company if they can add it to your existing policy. This is the simplest and probably cheapest option. To make sure you're getting the best bargain, you may compare rates online.
Gap insurance will almost certainly be offered by the dealership, but it will almost surely be more expensive than one offered by a big insurer. In any case, double-check that your vehicle isn't already covered by gap insurance. Gap coverage is frequently included in the cost of auto leases.
The Bottom Line
Unless your lease or loan arrangement specifies otherwise, gap insurance is normally an optional insurance coverage. However, if you've just spent a lot of money on a new car, it could provide you with a lot of peace of mind.
Car gap insurance is very important for people who have a lot of negative equity on their vehicles. This includes drivers who put down a small deposit or who have a long loan repayment duration. If you want to save money on auto insurance, one method to do it is to avoid paying for gap insurance when you don't need it.