Auto gap insurance has been around since the early 1980’s, but many people are unfamiliar with this insurance protection. Briefly, it covers the amount of difference between a car’s value according to the Kelley Blue Book used for calculating values, and the amount of the loan a person has on a vehicle. This especially applies to new vehicles, which depreciate about 20 percent the moment they are driven off the lot, but this auto insurance policy also can be purchased for used or leased vehicles as well. Gap insurance is for those whose insurance does not pay replacement value or amount owed, but only fair market value.
Why is it Called Gap Insurance?
It is called gap insurance because it will pay for that difference, or gap, that exists between the fair market value of the vehicle and the insurance coverage on the vehicle. The insurance coverage would only have covered the actual purchase price of the vehicle, and not any accumulative interest. However, if your vehicle was totaled in an accident, yet is not fair market valued at the same amount of insurance coverage, your lender will still expect to be repaid the entire amount of the loan. For example, a $20,000 sticker price vehicle may depreciate 20%, or $4,000 immediately. The loan would be for at least $20,000, and interest added starting immediately. Let’s say that the actual loan plus interest over a time period amounts to, for this example, $21,400. If you wrecked the car immediately, the market value would only be $16,000, but you would still be owing the $21,400, or a gap of $5,400 you would have to pay. Your gap insurance would cover this difference.
Gap Insurance Can be Purchased After you Buy your Car
The cost of gap insurance varies, and you should shop around. A car salesman may say that you can only buy it from them at time of purchase, but that is untrue. The dealer may charge $500 to $700 for gap insurance that you can find on the internet for about $400. So, it pays to be informed and shop around before you purchase, just as you should for your insurance.
Auto gap insurance is especially needed when you purchase a new car, because they do cost a large amount, and their depreciation is also a large amount. This gap auto insurance is frequently included with lease cars, and it is available for used cars. Shop around to find the best deals before you sign, although with lease cars, there may be no other option but to take what is offered by the lease company.
Coverage Varies So Read Your Policy Carefully
Be sure to know all the details of your gap insurance, such as exactly what type of losses are covered. Find out how much coverage you actually will have, so you can determine whether it is worth getting before you decide. Usually you want gap insurance if you cannot put a large amount down (like 30%) on your new or lease car, because the depreciation difference will be less if you can start with a large down payment and borrow less. Then you are more likely to have a fair market value more equal to what you owe, but also would be out your large down payment if you have a totaled out vehicle.
Lack of Gap Insurance Can Leave you Holding the Bill
If you do not have gap insurance and your new or leased car is totaled in an accident, you will have to pay the amount your insurance does not with regard to any loan you have on that vehicle. This can amount to thousands of dollars. Unfortunately, a handful of states do not allow gap insurance. These include Connecticut, Louisiana, New Mexico, Vermont, Washington, Virginia, New York, and New Hampshire. Most contracts for auto gap insurance run up to 60 months. With accidents happening all the time, having this auto insurance is prudent.
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