What is Gap Insurance and Why Do You Need It?
When you drive off the lot with a new car, its value starts to depreciate almost immediately. If your car is totaled or stolen, your standard auto insurance policy will only cover the current market value of the vehicle, which might be significantly less than what you still owe on your loan or lease. This is where Gap Insurance comes into play.
What is Gap Insurance?
Gap Insurance, or Guaranteed Asset Protection insurance, is an optional coverage that helps bridge the gap between the amount you owe on your car loan or lease and the car’s actual cash value (ACV) at the time of a total loss. Essentially, it ensures that you are not left paying out of pocket for a car you can no longer drive.
How Does Gap Insurance Work?
Here’s a simple example to illustrate how Gap Insurance works:
Loan Balance: You owe $20,000 on your car loan.
Actual Cash Value: Your car is worth $17,000 at the time of the accident.
Insurance Payout: Your standard auto insurance will pay $17,000, the current market value of the car.
Gap Coverage: Gap Insurance covers the remaining $3,000, so you don’t have to pay this amount out of pocket.
Why Do You Need Gap Insurance?
Protection Against Depreciation: New cars depreciate quickly, often losing 20% of their value within the first year. Gap Insurance protects you from this rapid depreciation.
Financial Security: In the event of a total loss, you won’t be left with a hefty loan balance to pay off.
Peace of Mind: Knowing that you’re covered in worst-case scenarios can provide significant peace of mind.
Who Should Consider Gap Insurance?
New Car Owners: Especially if you made a small down payment or have a long-term loan.
Leased Vehicle Drivers: Many lease agreements require Gap Insurance.
High-Interest Loans: If you have a high-interest loan, your loan balance might exceed the car’s value for a longer period.
