Gap insurance, short for guaranteed asset protection, is an extra coverage you can get that fills the gap between what your car is worth and what you still owe on it if it’s stolen or totalled. It’s helpful if your regular insurance payout doesn’t cover the full amount you owe on your car loan.
Here’s why it matters: If your car is wrecked or stolen, you’re still on the hook for paying off your loan, even if your insurance doesn’t cover everything. That’s where gap insurance steps in.
But here’s the thing: If you don’t have a car loan or lease, you don’t need gap insurance.
What Does Gap Insurance Cover?
Gap insurance kicks in to cover what you still owe on your car loan or lease if your car is totalled or stolen, even after your regular insurance pays out. Regular insurance usually only covers your car’s current value after things like accidents or theft.
But if you still owe more on your loan than what your car is worth, gap insurance fills in that gap and covers the difference.
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How Does Gap Insurance Work?
Gap insurance kicks in to cover the difference between what you still owe on your car and what your insurance pays out if your car is totalled or stolen. It comes into play after your regular insurance, like comprehensive and collision coverage, which pays for damages from things like accidents or theft.
But here’s the catch: Regular insurance only pays what your car is worth at the time of the incident. So if you owe more on your loan or lease than that, gap insurance steps in to cover the extra amount.
Let’s break it down:
You have a car loan of $30,000, but your car is now worth only $25,000. If something happens to your car, like it’s stolen or totalled, your regular insurance will pay the current value of your car, which is $25,000. But here’s the thing: You still owe $30,000 on your loan.
With gap coverage, you’d only need to pay your deductible, which is typically around $500. Without gap coverage, you’d have to pay the deductible plus the remaining balance on your loan, which in this case is $5,500. So, gap coverage can save you from having to pay a hefty amount out of pocket if something happens to your car.
Is Gap Insurance Worth?
You only really need gap insurance if you’re leasing a car or have a loan on it. If you’ve paid off enough of your loan so that you owe less than what your car is worth, you can skip gap insurance.
But if you do have a lease or loan, it’s worth considering whether you could handle paying the difference between what you still owe and what your car is worth if something happened to it. If that’s a stressful thought or you’re not sure you could swing it financially, then getting gap coverage could give you peace of mind.
How To Get Gap Insurance
Gap insurance is a type of coverage that can be added to your auto insurance policy to protect you if you still owe money on your vehicle or lease. Here’s how it works and what you need to know about getting it:
Firstly, not everyone needs gap insurance. It’s generally only necessary if you’re still paying off your car loan or lease. If you’ve paid off your vehicle completely, you typically won’t need gap insurance.
If you do have a car loan or lease, there are certain criteria you may need to meet to add gap insurance to your policy. These requirements can vary depending on the insurer, but some common conditions include:
- Your car is typically no more than two to three years old.
- You are the original owner of the vehicle.
There are two main ways to purchase gap insurance:
- Through your auto insurer: Many insurance companies offer gap insurance as an optional add-on to your regular auto insurance policy. You can inquire with your insurer about adding this coverage to your existing policy.
- Through the dealership or lender: Some dealerships or lenders may offer gap insurance as part of your loan package when you purchase or lease a vehicle. In this scenario, the cost of the gap insurance may be rolled into your loan payments. However, it’s important to note that buying gap insurance through the dealership or lender can be more expensive in the long run because you’ll be paying interest on the cost of the insurance over the life of the loan.
If you decide to purchase gap insurance through your dealership or lender, here are a few things to keep in mind:
- Review your auto loan contract: Check your loan agreement to see if gap insurance is required by your lender. While not all lenders require it, many will mandate that you have comprehensive and collision coverage.
- Leasing agreements: If you’re leasing your car, the dealership may automatically include gap insurance in your lease agreement. Be sure to review your lease contract to understand if gap insurance is already included.
- Transitioning between providers: If you initially purchased gap insurance through your dealer but later decide to buy it from your insurer, you may be able to remove it from your car loan contract. However, ensure that you maintain coverage during the transition period to avoid any gaps in protection.
In summary, gap insurance can provide valuable financial protection if you still owe money on your vehicle or lease. However, it’s essential to understand the requirements and options available to you before deciding whether to add this coverage to your auto insurance policy.
How Much Does It Cost?
Gap insurance from your auto insurer typically costs just a few extra dollars per month or around $20 per year. However, the exact cost depends on factors like the value of your car. Keep in mind that you’ll also need to have comprehensive and collision coverage in addition to gap insurance. To make sure you’re getting the best deal, it’s a good idea to compare rates from at least three different insurance companies.
If you decide to purchase gap insurance through your lender or dealership, they usually charge a flat fee of around $500 to $700. However, if you include the cost of the insurance in your loan, you’ll also pay interest on it. This means that throughout your loan, you could end up paying more than the initial fee of $500 to $700. It’s important to compare costs from both your dealer and car insurance company to find the most affordable option for you.
Keep in mind that prices and interest rates can vary, so it’s always a good idea to check with your dealer and car insurance company to accurately compare costs and make an informed decision.