When buying a vehicle and especially one that is brand new it’s not only about the thrill of taking off in the dream car you’ve always wanted. There are many financial considerations to consider and one key word that must be on the buyers’ agenda is “gap insurance.” If you’ve ever pondered the meaning of gap insurance and how important it is this guide can aid you in making a well-informed choice.
What Is Gap Insurance?
Gap insurance, which is short for Guaranteed Asset Protection Insurance is a specific kind of insurance specifically designed to protect the owners of cars in a particular financial circumstance. It fills in gaps “gap” between the amount you owe on your vehicle lease or loan and the Actual Cash Value (ACV) in the event of full loss or theft.
Simply put the fact is that vehicles appreciate quickly and some are worthless as soon as you take them off the lot. If your vehicle is damaged or stolen due to an accident your typical auto insurance policy generally will only cover the vehicle’s market value at the time of the incident and may not cover the amount due on the loan. This is when gap insurance comes in to provide the difference and preventing the borrower from the need to pay for it out of pocket.
Who Should Consider Gap Insurance?
Although gap insurance isn’t required, it could be a lifesaver financial for some customers. If you’ve bought an automobile with a tiny down payment, or taken out the loan for a long time then you’re at a greater chance of having to pay more than what the car is worth. In addition, if you lease your car, the majority of leasing firms have a requirement for gap insurance as a condition of the agreement.
Customers who purchase premium vehicles or ones that have high depreciation rates could consider gap insurance beneficial. Without this insurance you could be facing an unexpected financial loss in the event that something unexpected happens.
How Does Gap Insurance Work?
To better understand the way that gap insurance functions in the real world, let’s take the following scenario. Imagine that you buy a car for $30,000 and then finance the purchase with the help of a loan. One year later your vehicle is involved in a major accident and is declared a total loss. At this point, your car’s value has decreased to $25,000, yet you are still responsible for $28,000 for the loan. The standard auto insurance policy will be able to cover the ACV of $25,000 leaving a gap of $3,000 which you’ll need to cover out of your pocket. In the event that you’re covered by gap insurance it will pay for that $3,000, alleviating you of this financial strain.
Where Can You Get Gap Insurance?
Gap insurance is available from various sources, such as dealers, lenders, or traditional insurance companies. Many people opt the option of adding gap insurance the existing insurance plan for their vehicle to make it easier, however it’s important to consider prices and terms prior to making a choice. Dealerships usually provide gap insurance, however their rates may be higher than standalone insurance firms.
Before buying, verify that your leasing or lender has gap insurance included in the terms of your contract. If it’s already included it, you don’t need to purchase it separately.
Is Gap Insurance Always Necessary?
Although gap insurance has certain benefits, it’s required for all car owners. If you’ve purchased a pre-owned car that has an extremely low depreciation rate, or if you’ve bought the vehicle in full then you might not require the coverage. In the same way, if you’ve put in an enormous down payment or repaid a large portion of your loan, the difference between the loan amount and the market value of your car could be small, which makes gaps insurance less necessary.
If you want to know whether gap insurance is worth considering the particulars that you have to pay for your vehicle, the car’s depreciation rate, as well as your personal financial position. For some, avoiding gap insurance could be a sensible choice however in the case of others, gap insurance is a vital security measure for your finances.
How Much Does Gap Insurance Cost?
The price of gap insurance is different according to where you buy it as well as the particulars of your car and loan contract. Typically the addition of gap insurance to your existing auto policy will cost you between $20 and $40 annually. Contrarily purchasing it from a dealership could result in a one-time fee which can be anywhere between $400 and $700, and is usually being rolled into a vehicle loan. While this option is practical, it’s typically more expensive than buying it from an insurance company.
Final Thoughts on Gap Insurance
Gap insurance can provide peace of peace of mind and financial security to motorists who would otherwise be in a financial bind should there be total destruction or theft. It’s especially beneficial for people who have new vehicles and long-term loans or smaller down payment. Although not all people require the gap coverage, it’s worthwhile to look at your particular circumstances to determine if this type of insurance is suitable for you.
In the end, gap insurance is more than an added cost; it’s a security that could stop a financial disaster from happening. If you decide to purchase it or not, staying aware of your options will ensure that you’re making the right decision for your financial security.