When purchasing a new or used car, many buyers focus on getting the best deal on the vehicle itself and selecting the right type of auto insurance. However, one aspect of car insurance that’s often overlooked is car gap insurance. While it’s not mandatory, gap insurance can be a financial lifesaver, especially in the event of an accident or theft. Here, we’ll discuss what car gap insurance is, why you need it, and how it can provide peace of mind in case the unexpected happens.
What Is Car Gap Insurance?
Car gap insurance, or Guaranteed Asset Protection insurance, is a type of coverage designed to protect you from financial loss if your car is totaled or stolen. When you buy a new car, it starts to depreciate the moment you drive it off the dealership lot. Typically, within the first few years, the value of a new car can drop by 20-30%. If you have a car loan or lease, you may owe more on the vehicle than it’s worth.
In the event that your car is totaled in an accident or stolen, your standard auto insurance will only cover the actual cash value (ACV) of the car, which is its current market value at the time of the loss. This amount is usually lower than what you owe on the loan or lease. Gap insurance covers the difference (or “gap”) between what you owe and what the insurance payout covers, preventing you from being stuck paying the remainder of the loan balance for a car you no longer have.
Why Is Car Gap Insurance Important?
One of the primary reasons car gap insurance is so important is due to the rapid depreciation of vehicles. A new car can lose a significant portion of its value, sometimes as much as 30% or more, in the first year alone. If you’ve financed your car with a loan for the full gap insurance for cars purchase price or are leasing the vehicle, there’s a high chance that you could owe more than the car is worth in the early years of ownership.
For example, if you buy a car for $30,000 and finance it with a loan, the vehicle might depreciate to $22,000 after a year. If your car is totaled, your insurance would pay the $22,000 market value of the car, but if you still owe $28,000 on the loan, you would be responsible for the remaining $6,000. Without gap insurance, you would have to pay that amount out of pocket.
Who Should Consider Gap Insurance?
Although gap insurance isn’t required by law, it’s a valuable option for certain types of car buyers. If you:
- Made a small down payment: If you put down less than 20% when purchasing your car, you may owe more than your vehicle’s value in the first few years.
- Have a long-term loan: Loans that extend beyond 60 months can result in you owing more than your car is worth, particularly in the early years.
- Are leasing a vehicle: Lease agreements typically involve lower down payments and monthly payments, which can make it easier to owe more than the car’s value during the lease term.
- Bought a vehicle with high depreciation: Some cars lose value faster than others, which could lead to a larger gap between what you owe and the car’s value.
How to Get Gap Insurance
Gap insurance is usually available through your auto insurance company, dealership, or lender. Many dealerships offer it as an add-on during the vehicle purchase process, but it’s often cheaper to get it through your car insurance provider. If you already have a car insurance policy, check with your provider to see if gap insurance can be added for an affordable cost.
When purchasing gap insurance, carefully review the terms and conditions. Be sure to understand what’s covered and any exclusions, as some policies may have limitations.
Conclusion
While it’s not a requirement, car gap insurance can offer crucial financial protection for car buyers, especially those financing or leasing a vehicle. With the rapid depreciation of new cars, gap insurance ensures that you won’t be left with a significant financial burden if your car is totaled or stolen. If you’re purchasing a new car, leasing, or have a small down payment, gap insurance is worth considering to protect yourself from financial loss. Be sure to consult with your insurance provider or dealership to see if it’s the right option for you.