How Does Gap Insurance Work
Introduction
Are you in the market for a new car? If so, you may have heard of something called “gap insurance.” While it may sound confusing at first, gap insurance is actually a straightforward concept that can provide valuable protection for car buyers. In this article, we’ll break down exactly what gap insurance is, how it works, and whether or not you need it.
Table of Contents
- Introduction
- What is Gap Insurance?
- How Does Gap Insurance Work?
- When Do You Need Gap Insurance?
- How Much Does Gap Insurance Cost?
- Where Can You Buy Gap Insurance?
- Gap Insurance vs. Extended Warranties
- Pros and Cons of Gap Insurance
- Alternatives to Gap Insurance
- How to Choose the Right Gap Insurance Policy
- Tips for Making a Claim
- Conclusion
- FAQs
What is Gap Insurance?
First, let’s define gap insurance. Gap insurance (guaranteed asset protection insurance) is a type of auto insurance that covers the “gap” between what you owe on a car loan or lease and the car’s actual cash value (ACV) if it’s totaled or stolen. In other words, if your car is totaled or stolen and you owe more on your loan or lease than the car is worth, gap insurance will cover the difference.
How Does Gap Insurance Work?
Gap insurance works by paying the difference between your car’s ACV and what you owe on your loan or lease. For example, let’s say you bought a car for $30,000 and put $3,000 down. You financed the remaining $27,000 over five years. After three years, you still owe $18,000 on your loan, but your car is now worth $15,000. If your car is totaled in an accident or stolen, your insurance company will only pay you the car’s ACV of $15,000. That leaves a “gap” of $3,000 that you still owe on your loan. If you have gap insurance, it will cover that $3,000 so you don’t have to pay it out of pocket.
When Do You Need Gap Insurance?
Gap insurance is typically recommended for people who:
- Lease a car
- Have a long loan term (over 60 months)
- Have a high-interest loan
- Made a small down payment (less than 20% of the car’s value)
If you don’t fall into any of these categories, you may not need gap insurance. However, it’s still a good idea to research gap insurance and determine if it’s right for you.
How Much Does Gap Insurance Cost?
The cost of gap insurance varies depending on the car, the loan or lease, and the insurance provider. Typically, gap insurance costs around $20 per year if you purchase it through your car insurance provider. If you buy gap insurance from the dealership, it may cost more.
Where Can You Buy Gap Insurance?
You can buy gap insurance from a variety of sources, including:
- Car insurance providers
- Dealerships
- Credit unions
- Online insurance providers
It’s important to compare prices and coverage options from different providers to ensure you get the best deal.
Gap Insurance vs. Extended Warranties
Gap insurance and extended warranties are two types of protection for your car, but they cover different things. Gap insurance covers the difference between what you owe on your car loan or lease and the car’s ACV if it’s totaled or stolen. Extended warranties cover the cost of repairs to your car if it breaks down due to a mechanical or electrical issue.
Pros and Cons of Gap Insurance
Like any type of insurance, gap insurance has pros and cons. Some pros of gap insurance include:
- Provides peace of mind: Knowing that you’re protected if your car is totaled or stolen can provide peace of mind and protect you from financial hardship.
- Low cost: Gap insurance is relatively inexpensive, especially compared to the cost of repairing or replacing a totaled car.
- Easy to obtain: You can purchase gap insurance from a variety of sources, including your car insurance provider, dealership, or online.
Some cons of gap insurance include
- May not be necessary: If you have a short loan term, a low-interest loan, or a large down payment, you may not need gap insurance.
- Limited coverage: Gap insurance only covers the difference between your car’s ACV and what you owe on your loan or lease. It does not cover repairs or other expenses.
- Duplicates coverage: If you already have collision and comprehensive coverage, you may not need gap insurance, as these policies already cover the ACV of your car.
Pros and Cons of Gap Insurance
Like any type of insurance, gap insurance has pros and cons. Some pros of gap insurance include:
- Provides peace of mind: Knowing that you’re protected if your car is totaled or stolen can provide peace of mind and protect you from financial hardship.
- Low cost: Gap insurance is relatively inexpensive, especially compared to the cost of repairing or replacing a totaled car.
- Easy to obtain: You can purchase gap insurance from a variety of sources, including your car insurance provider, dealership, or online.
Some cons of gap insurance include
- May not be necessary: If you have a short loan term, a low-interest loan, or a large down payment, you may not need gap insurance.
- Limited coverage: Gap insurance only covers the difference between your car’s ACV and what you owe on your loan or lease. It does not cover repairs or other expenses.
- Duplicates coverage: If you already have collision and comprehensive coverage, you may not need gap insurance, as these policies already cover the ACV of your car.
Alternatives to Gap Insurance
If you don’t want to purchase gap insurance, there are some alternatives you can consider. These include:
- Increasing your down payment: Making a larger down payment can reduce the amount you owe on your loan and reduce the risk of having negative equity in your car.
- Shortening your loan term: Taking out a shorter loan term can reduce the risk of having negative equity in your car.
- Choosing a car with a good resale value: Cars that hold their value well are less likely to have negative equity.
How to Choose the Right Gap Insurance Policy
If you decide to purchase gap insurance, it’s important to choose the right policy. Here are some factors to consider:
- Cost: Compare prices from different providers to ensure you’re getting the best deal.
- Coverage: Make sure the policy covers the full gap amount and any additional expenses, such as your deductible or taxes.
- Provider: Choose a reputable provider with a good track record of paying claims.
- Exclusions: Read the policy carefully to understand any exclusions or limitations.
Tips for Making a Claim
If your car is totaled or stolen and you need to make a gap insurance claim, here are some tips to help the process go smoothly:
- Report the loss to your insurance company and gap insurance provider as soon as possible.
- Keep all documentation related to the loss, including police reports, insurance paperwork, and receipts.
- Cooperate with the insurance adjuster and provide any information they request.
- Review the settlement offer carefully and ask questions if you don’t understand something.
- Be prepared to negotiate if the settlement offer is too low.
Conclusion
Gap insurance is a type of auto insurance that covers the “gap” between what you owe on a car loan or lease and the car’s ACV if it’s totaled or stolen. While it may not be necessary for everyone, it can provide valuable protection for car buyers who have a long loan term, high-interest loan, or small down payment. If you do decide to purchase gap insurance, be sure to compare prices and coverage options from different providers to ensure you get the best deal.
FAQs
Is gap insurance required by law?
No, gap insurance is not required by law. However, it may be required by your lender if you have a long loan term or small down payment.
Can you cancel gap insurance?
Yes, you can usually cancel gap insurance at any time. However, you may not be eligible for a refund depending on the policy terms.
Does gap insurance cover theft?
Yes, gap insurance covers theft as well as total loss due to accidents.
