Many auto insurance plans will pay for repairs to your car, but what happens when the car is totaled? In some situations, you may only get the replacement value of your vehicle, regardless of what you still owe. This means you may still owe money on a car you can no longer drive or use, which creates an array of problems.
Gap auto insurance applies when there is a gap between what your car is worth and what you still owe on it. “Gap” is short for “guaranteed auto protection.” Gap insurance is not part of most auto insurance policies, but you can add it to your plan or purchase separate insurance to cover this type of situation. Shopping around by getting a few quotes will help you get the best deal — and Policy Scout can help with that process.
Your vehicle starts to depreciate as soon as you drive it away from the dealer. In fact, some experts indicate that you lose around 10 percent of the car’s value as soon as you leave the car lot. Of course, the amount you owe on the vehicle may not always decrease proportionately. In those situations, you can be “underwater” on the car.
Gap insurance doesn’t make sense for everyone. Some vehicle owners do not need it at all because of their current vehicle situation. Gap insurance works well when:
The vehicle you just purchased has significant value.
You are leasing or buying a new or only slightly used car.
You made very little or no down payment on a new or slightly used vehicle.
You do not have cash savings that could make up the difference between the vehicle’s actual value and your loan amount.
You drive more than 15,000 miles per year.
You have long-term financing.
If your car depreciates faster than you can pay your vehicle, then gap insurance may be a good idea for you.
When you purchase a new or slightly used car, many dealerships will offer you gap coverage. While gap coverage may be a good idea in that situation, it is often much more expensive from a dealership. You can usually add on gap coverage with your own auto insurance carrier for a fraction of the cost. Many dealerships offer their employees extra commission if they can sell gap insurance, so there may be a hard push on you to purchase it at that point.