When you buy a new car, the moment you drive it off the lot, the car is now considered a used car. For this reason, the value of the car decreases dramatically. Gap insurance helps covers the gap between what your vehicle is worth, and what you would have to pay if you car was in a collision. It can also help cover theft. Gap insurance is most important with new cars, which is why car dealerships often try selling it to buyers. However, it’s best to buy a gap insurance policy from your auto insurance company.
How Exactly Does it Work?
Let’s say you buy a new car for $30,000. When you drive it home, the car is now considered “used” and the value drops down to $24,000. If you get into an accident, your regular auto insurance policy will only cover the cost of the vehicle at the current market rate, which would be $24,000. Your normal auto insurance policy does not take into consideration the loan on the car, so you are now short $6,000. With a gap insurance policy, it would help cover the missing $6,000!
Basically, Gap insurance covers the difference between the actual cash value (ACH) and the amount you owe on the car.
Why is it important?
Gap insurance is helpful for drives whose loan on their car is greater than the value of the car. For cars that are completely paid off, gap insurance is essentially useless. Or if your loan amount is less than the value of the car, gap insurance doesn’t give you any advantage. However, if you get into a bad accident and your car is totaled, then gap insurance is incredibly helpful. Keep in mind that gap insurance is also useful in the event of a theft! Gap insurance is another layer of protection and can help give you some peace of mind.
Factors that Affect the Cost of Gap Insurance
There are many factors that can affect the cost of gap insurance coverage. Some of them include:
Whether you are buying or leasing
The value of the car
The loan amount
Where you get your coverage (car dealer, banks, or auto insurer)
Most often, your auto insurance company will have the best deal on gap insurance. Car dealerships and banks frequently include the cost with other financing terms, which increases the price.
Do I need to buy Gap Insurance?
At the end of the day, it’s up to you. Depending on factors such as the value of your car and your loan amount, you may feel as though you need coverage. If you have a comprehensive collision policy, you may have gap insurance included in that. Check with your auto insurance agent to double-check you current policies. You could already have it! Also speak to your insurance agent if you are unsure whether or not gap insurance will be helpful for you in the event you get into an accident.