Full auto coverage isn’t exactly what you think it is. From the phrasing of it, full coverage sounds like it will completely cover your vehicle if it’s ever declared a total loss. However, that’s not always the case and you could be left owing thousands of dollars on your car loan if your vehicle is totaled.
Understanding Gap Insurance
That gap between the insured value of your car and the amount owed on your auto loan is where Gap insurance comes in. Gap insurance covers the difference between your car value and your outstanding loan if your car is ever declared as a loss.
Full coverage actually covers the market value of your vehicle at the time of the loss. However, there could be a difference between the market value of your car and the amount you owe on your auto loan. This can happen if your car is totaled in the first few months of ownership.
Is Gap Insurance Worth It?
Because vehicles depreciate quickly in the first few months, even minutes, after purchase, you can easily owe more on your auto loan than the market value of the vehicle. This is even more prevalent with buyers who made low down payments.
For example, imagine buying a car for $30,000 and making $600 payments each month for four months. The value of your loan would be $27,600. But if the market value of your car at that time is $24,000, you would have a gap of $3,600. Your auto insurer would pay $27,600 toward the loan, but you’d be responsible for coming up with the other $3,600 to pay off your auto loan. Gap insurance coverage, if you had it, would pay the $3,600 on your behalf. Some policies even cover your car insurance deductible.
You might need gap insurance if you purchased a car with a low down payment, you purchase a vehicle that depreciates quickly, you still had money owed on a trade-in, or you’re leasing a car. Car buyers with large down payments typically won’t need gap insurance because they won’t have the coverage gap between the market value and outstanding loan amount.
Unless you’re leasing a vehicle, gap insurance isn’t required. The car salesman may push you into getting gap coverage, but you should only get coverage if you’ve determined you actually need it. Lease agreements typically require you to have gap coverage in addition
to leasing insurance. There’s no way out of this if you want to lease the vehicle.
The same company who issues your full coverage policy may offer gap coverage. If not, many car dealerships offer gap insurance coverage and will add the insurance cost into your loan. Finally, you can search gap insurance providers through another car insurance company by looking online. You’ll probably get a better price on the insurance if you shop around for your own insurer rather than using the insurance provided by the dealership.
Gap Insurance vs. Lease/Loan Payoff Coverage
Some insurance companies offer lease/loan payoff coverage as an alternative to gap insurance. The insurance benefits are similar, but there are some key differences that come into play if you’re deciding which to get. Lease/loan payoff coverage pays the “gap” up to a percentage of the actual cash value of your vehicle, but it does not cover your deductible. Also, gap insurance typically has to be purchased within a certain number of days after your car purchase and it’s only available on brand new cars, not used or pre-owned cars. Lease/loan payoff coverage can typically be added at anytime as long as the vehicle was financed through a bank and it may be available through your current auto insurance provider.
All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. The Money Alert does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to this web site or incorporated herein, and takes no responsibility. All such information is provided solely for convenience purposes only. The Money Alert is not affiliated with any of the firms or entities listed unless specifically stated. The Money Alert does not provide investment, tax or legal advice. Please consult the appropriate professional regarding your personal situation.