Buying a car is probably one of the biggest purchases you’ve ever made or will make. It’s a pretty big deal. Beyond choosing which model and make you like – not to mention which paint color – you also have to think about which insurance coverages to choose for your new ride. One insurance coverage that might have you scratching your head is gap insurance. What is gap insurance? And, well, do you really need it? We’ll explain what you need to know about gap insurance.
What is gap insurance?
So, plenty of people think that if they’re in an accident, their car will be replaced for either the amount they paid for it or the amount they owe on the lease. But that’s not quite the case. The vehicle will be likely be replaced for what it was worth at the time of the accident or total loss.
And a new car’s value depreciates quickly (depending on the vehicle), and the value drops by quite a lot the second you drive off the lot. That means that if you’re in an accident a short time after getting the vehicle and the car is totaled, you might find yourself in the rather awkward situation of owing more money on the loan than the car was worth at the time of the accident.
That’s where gap insurance comes in. (It’s “real” name is guaranteed asset protection, but it so happens that the acronym is quite apt.) It’s an optional auto insurance coverage that can protect you if you owe more on the vehicle than the vehicle is worth at the time it was totaled. It will help you cover the difference between what the car is worth and what you owe on your loan. It covers the gap – get it?
Pro tip: If you’re taking out a loan on a car, your lender might require you to have collision and comprehensive insurance.
Here’s an example.
Let’s say you take out a $30,000 loan to buy a car (we’re assuming the vehicle costs $30,000.) After a year, the car is worth $24,000. But you still owe $27,000 on the loan.
So, these are the circumstances when you accidentally total your new ride.
You’ll come up $3,000 short when it comes to the balance on your loan, but gap insurance could step in and cover that amount. And then that $3,000 won’t be coming out of your own pocket.
Do I need gap insurance?
There are a few situations in which you might want to think about getting gap insurance to protect yourself against being “upside-down” (meaning you owe more on your loan than the vehicle is worth.)
If any of the following apply to you, you might want to give gap insurance some thought:
- You took a zero percent down payment option.
- You put a small amount down on the vehicle.
- Your loan will last beyond three years.
In any of these scenarios, you could find yourself owing more on your loan than your vehicle is actually worth if it’s totaled.
What if I’m buying a used vehicle?
If you’ve decided to buy a used vehicle, you will most likely not be able to get gap insurance. It’s typically for new vehicles. However, you can cover your risk by making a sufficient down payment on the car and financing the vehicle for the shortest timeframe possible.
Do I need gap insurance if I leased my vehicle?
If you’re planning on leasing a vehicle, gap insurance is often considered crucial because there is no trade-in and little cash to put down on the vehicle to lease it. You could end up owing the difference between what you’ve paid and what you still owe on the balance of the lease if the car is totaled, just like if you bought a new vehicle.
So, it’s definitely something to think about.
How much does gap insurance cost?
Gap insurance is usually available for a nominal fee. It’s not super expensive considering the added protection it gives you for your new vehicle.
So, that’s the deal about gap insurance. It’s designed to protect you when you buy a new car and could potentially owe more on your loan than your vehicle is worth. If you’re buying or leasing a car, you might want to give some thought to adding gap insurance to your car insurance plan.
And if you’re buying a new car, we can help you get the insurance you need. We know that car insurance can get overwhelming, which is why our goal is to make car insurance as easy as possible. We can help you get quotes for your car insurance, and all you have to do to get started is fill out our online quote form or give us a call today.