If you have a serious car accident, or if your car gets stolen, Gap Insurance could save you thousands of dollars. Gap Insurance could also be called “totaled or stolen” car insurance.
Gap Insurance “closes the gap” between what your auto insurance company pays if your car is totaled or stolen, and the payoff balance of your auto loan.
In other articles, I’ve written about how insurance companies will “lowball” even their own policyholders when it’s time to total out a car. Often, it gets even worse if you’re not at fault, and the other driver’s insurance company is settling your claim. So, one of the ways that you can get some piece of mind…and all the money you are entitled to collect…is to buy Gap Insurance.
Here’s an example. You buy a new car for $25,000. No money down, financed for 60 months. Two months later, your car is stolen. The adjuster makes his WAG (wild-a** guess) on depreciation and determines that your car is only worth $20,000, having lost 20% of its value. The finance company tells you that with tax, title, and license fees, your payoff is $27,000.
What will you do to payoff the car when the insurance company will only pay $20,000, and you owe $27,000? If you have Gap Insurance, no problem.
There are basically four reasons that you might benefit from Gap Insurance:
1. Leased cars – Many times when you lease a car, the leasing company will require you to buy Gap Insurance. If you exceed the mileage in your lease term, the vehicle might have a lower value at the end of the lease term. Many companies will allow you to buy Gap coverage any time during the lease period.
2. New cars – If you are putting 20% or more as a down payment on your car, you might not need Gap coverage. However, if you’re like many these days, and signing 0% down finance deals, your car will depreciate a bunch in the first year, and you’ll never get the value of that car at damage or theft.
3. Used cars – You could find that you paid more for a used car than it’s worth. Many Gap Insurance companies will allow you to buy coverage if the used car is less than 2 years old.
4. “Upside down” or “underwater” – Terms that mean you owe thousands more than the value of the car. This often happens when a person trades in a car and owes more than the value of the car he’s trading in. The finance company allows you to add the unpaid balance of the trade-in to the financed amount of your new car loan. But then you’ll likely always be “upside down” in the loan, and you’d be in deep financial trouble without Gap Insurance.
Keep in mind that most insurers will require you to have Collision and Comprehensive coverage for the Gap Insurance to apply. Most insurers will also require you to continue making your car payments until the coverage pays its benefits.
You can shop for Gap Insurance through various car insurers. Contact your own insurance company to see if they offer it. Otherwise, you could search on the Internet for companies that sell Gap Insurance. There are many from which to choose.
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