What is Gap Insurance and When Do You Need It?
If you’ve purchased a car before, your dealer might have offered you gap insurance, also known as Guaranteed Asset Protection. Generally, this insurance is offered by a dealership’s finance department and is specifically designed as an add-on to your primary insurance (comprehensive or collision). If you are wondering what gap insurance really covers and whether it is worth buying one, read on to get some insights.
What is Gap Insurance?
In simple terms, gap insurance is an additional insurance you can buy for your car to cover the cost between your car’s actual value and the amount you still owe on your car loan when your car is written off. For instance, you buy a car for $25,000 and choose to finance the entire amount over a period of five years. After the first year, you get into an accident and unfortunately, your car gets totaled. Your primary insurance will pay your car’s actual value, let’s say $15,000. At this time, you might still owe your finance company at least $19,000. If you had bought gap insurance, you will get the difference of $4,000 from the company, thus helping you pay the gap easily. So if you happen to get involved in an accident or your car is stolen, you don’t lose any extra money from your pocket.
Should You Buy Gap Insurance?
Whether or not gap insurance is worth buying is largely dependent on the way you choose to pay for your vehicle. The kind of car you have purchased will also determine whether gap insurance is right for you. If you paid more than 20% down or have made a majority of the payment for your car in cash, you need not consider adding this to your primary insurance policy. The reason being that gap insurance is primarily for cases when you owe more on your loan than your car’s value and in such scenarios, you probably won’t.
However, if you have chosen to pay a smaller down payment and your loan tenure is longer than 48 months, you should definitely consider buying gap insurance. In such cases, your car will depreciate much faster than your loan’s repayment amounts. For a few years after you buy your car, you are likely to be underwater on your loan and if you get involved in a car accident during this time, you’ll owe a lot more to the finance company than what you’ll get from your insurance company. This is exactly where gap insurance plays a vital role.
Where to Buy Gap Insurance?
Just like you would shop around for your primary auto insurance, you can consider various options to buy your gap insurance. You could add it to your policy from your insurance provider or consider it from your dealership. Most dealerships will offer this insurance when you purchase a new car from them. It is best to get a few quotes before you finalize on your insurance policy.
After careful analysis of your requirements, you will be able to determine whether gap insurance is right for you and then you can buy it at the best possible price.