Also known as totaled insurance, gap insurance applies to any difference between the amount that you owe on your car and the amount that the car is worth. Auto insurance usually provides coverage for repairs or replacement if you are involved in an accident or if you lose your car to theft. Standard insurance usually only applies to the actual cash value of the car, rather than the full amount that you owe on your car loan. If you do not have gap protection, you will need to pay off any remaining amount on your loan beyond the value of the car. Some standard policies include gap coverage, while some leasing companies may offer gap coverage as part of the lease. (This ensures a leasing company that it will be fully paid.)
Someone who owes more on their car loan than what their car is actually worth might consider gap insurance.
If you do not owe more than what your car is worth at any point during the loan term or lease, you will not need gap insurance. You can investigate the likely depreciation rate for your car online and use an auto loan calculator to determine the rate at which you will build equity in the car.
When a Gap Happens
Certain situations are more likely to result in negative equity, which is the technical term for a gap. If your vehicle depreciates especially rapidly, it could lose much of its value soon after its purchase. Also, if you do not make a significant down payment on the car, or if you make no down payment at all, your car may be worth less than what you owe on it almost immediately after you buy it.
Some consumers use loans to cover items beyond the price of the car. If the loan covers costs related to the license and registration, or if it covers a service plan, negative equity may develop. A loan with a longer term may increase the risk of negative equity because a consumer gains the benefit of lower payments in exchange for accumulating equity in the car at a slower rate.
If you know about the potential need for gap insurance in advance, you may want to finance your car in a way that avoids a gap.
Common Gap-Causing Factors
A small down payment
A loan larger than the purchase price
A loan with a longer term
Getting Gap Insurance
You can purchase gap insurance through your insurance company or another vendor. If you get this coverage through your insurance company, it will add a small amount to each of your premiums. This means that you can cancel gap insurance and reduce your overall premiums if you no longer need it. You should regularly assess whether the gap has closed to determine whether you still need this coverage. On the other hand, if you purchase gap insurance through an entity other than your insurance company, you probably will pay a one-time fee for it, so you will not need to think about canceling it.
A gap insurance policy is not always as straightforward as it sounds. You may want to review a range of options to make sure that you get the right coverage for you. It might cover any deductible on your standard insurance, or it might even offer a replacement for your vehicle. The policy should cover all types of loss. You may want to avoid buying gap coverage from a car dealer, since they tend to charge more for similar protection. Before you buy a policy online, you should investigate the vendor to make sure that they are trustworthy.