What is Gap Insurance and When Do You Need It?

What is Gap Insurance and When Do You Need It?

Gap insurance, also known as gap protection, helps you cover the difference between what you owe on your car loan and your car’s current value. Not everyone needs gap insurance, but for some, it might prove to be extremely essential. If you are considering adding gap (Guaranteed Asset Protection) to your policy, read on to know more about it.

What is Gap Insurance?

For most drivers, getting a normal comprehensive or collision policy will help cover the cost of repairs or damages caused to the car. However, in some cases, when the car is totaled, its actual cash value (ACV) might be lower than what you still owe on your lease or loan for the car. This difference in amount, also known as a gap, is not covered by your regular insurance plan. Your primary insurance company will only pay the value of your car before it was damaged. If you still have a large balance on your loan, you will have to pay that amount from your own pocket. In simple words, having gap insurance will help you bridge the gap between your auto loan and auto value.

What Causes a Gap?

Negative equity occurs when your car depreciates faster than the rate at which you are able to pay off your auto loan installments. This can put car buyers and lessees in a tough spot as the insurance policy will only pay for the car’s current value (ACV). If you want to replace your car with the same model or have a large loan pending, you’ll be in some financial trouble. Some of the reasons that lead to this gap include:

  • Having an Extended Term on Your Loan – Along with smaller payment installments, taking a long-term loan also means you build your equity in the vehicle at a much slower rate.

  • Depreciation – All cars depreciate over time. However, some models tend to depreciate at a comparatively faster rate than others. As per some estimates, there are particular cars that tend to lose almost 30% of their value in the first three months itself.

  • Paying Little or No Down Payment – If you have taken the assistance of a financial company for almost all of your car’s payment, you could be in an upside down situation on your loan the moment you drive away from the dealership. Normally, a new car will start depreciating as soon as it becomes used.

  • Taking a Loan Amount More Than the Car’s Price – If you have included the tax, registration, license and other extras in your loan, you will find a payment gap if you run into any car troubles.

Is Gap Insurance for You?

If you notice that any of the above points are true in your case, you should consider buying this insurance. Typically, gap insurance is cheap, around $20 a year or about a $500 one-time fee depending on various factors. If you are buying a new car and don’t have any extra cash in your pocket or your loan is upside down, it is a wise idea to invest in a gap insurance.