Whether you buy it new or used, a car is an investment. And it makes sense to protect that investment with the right insurance.
If you’re financing or leasing a new car, you might want to consider gap insurance. What is gap insurance on a car? This type of insurance can help pay off your lease or loan if your car is totaled and you owe more than it’s worth. Here’s what you need to know.
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What is gap insurance?
If your car is totaled in a covered accident, your collision insurance will pay up to the car’s actual cash value. But if you’re financing a new car or leasing one, you might owe more on the loan or lease than the cash value of the car.
Gap insurance covers the gap between the car’s value and what you owe on your loan or lease. Even if you aren’t a high-risk driver, gap insurance is often great to have.
How does gap insurance work?
Let’s say you just bought a brand-new car for $30,000, and it’s totaled in an accident when you still owe $20,000 on your car loan.
When you file a claim, your collision coverage will pay up to your car’s actual cash value at the time of the crash. New cars depreciate fast, so say your car’s value is $18,000.
The insurance company would pay your lender $18,000. But since you still owe $20,000 on your auto loan, you would need to come up with the remaining $2,000 on your own. However, if you have gap insurance, it would cover that $2,000.
What are the advantages of having gap insurance?
What is gap insurance on a car good for? It can help you in a number of ways.
Protection against financial loss
Depending on how much you still owe on your lease or loan, you might owe your lender thousands of dollars if your car is totaled. If you have gap insurance, you don’t have to worry about the financial strain of a large, unexpected bill.
Pays off the remaining loan balance
If your car is totaled, you’ll probably want to buy a new one. But that can be hard to do when you’re still making payments on the totaled car. Gap insurance can pay off the rest of the loan so that you won’t personally owe the lender.
Provides coverage for depreciation
Most brand-new cars depreciate 20% in the first year. That depreciation may be greater if you rack up more miles than average or if your car has some damage. No matter how much your car depreciates, gap insurance ensures you’ll be able to pay your lease or loan.
More comprehensive coverage than primary auto insurance
Even full coverage car insurance won’t pay the difference between your car’s actual cash value and your loan balance. But when you combine full coverage insurance with gap insurance, you can protect yourself and your car from almost any scenario.
How much does gap insurance cost?
That depends on where you get it. If you buy gap coverage at a dealership, you might be charged a flat rate of a few hundred dollars. However, if you add gap coverage to your existing car insurance, you might pay as little as $5 per month.
Is gap insurance necessary for everyone?
No, it isn’t. If you are financing or leasing a car, it might be helpful. Here are some situations where you may need it:
- You made a low down payment
- You have a long loan term
- The car you’re leasing or financing depreciates especially quickly
If your car was totaled today, could you afford to pay the lender the difference between your car’s cash value and what you owe on the loan? If the answer is no, having gap insurance could be a good idea.
Can you purchase gap insurance at any time?
You can usually buy gap coverage at any point until you pay off your loan or lease. However, some insurance companies have a specific window when you need to purchase coverage.
How to obtain gap insurance
Thinking about gap coverage? Here’s how to get it:
Step 1: Research gap insurance providers
Ideally, give yourself some time for this step. Many different insurance providers offer gap coverage, and your car dealer might, too.
Step 2: Gather the necessary information
Make sure you know the length of your loan term and interest rate. Calculating what you’ll owe on your loan at different points in the future can be useful. You can then compare your car’s estimated (depreciated) value over time and decide whether you need gap coverage for the life of your loan or just for part of it.
Step 3: Compare coverage options and prices
Make sure you fully understand what each provider does and doesn’t cover. Take a close look at pricing, too. Car dealers often charge high prices for the same coverage you’d get with an insurance company.
Step 4: Apply for gap insurance and complete the purchasing process
Once you’ve selected your provider, you’re ready to purchase your gap insurance and enjoy peace of mind.
Is Gap Insurance for You?
If you can’t afford to pay the difference between your car’s value and what you owe on your car loan or lease, gap insurance can be a smart investment. It’s especially wise if you made a small down payment or have a long loan term.
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FAQ
Can I cancel gap insurance if I no longer need it?
You can usually cancel at any time. However, if you’re leasing a car, the leasing company might require gap coverage.
Can I transfer gap insurance to a new vehicle?
Gap insurance is usually non-transferrable, but you can check with your insurance company to make sure.
Is gap insurance the same as extended warranties?
No — extended warranties generally protect you from repair costs. What is gap insurance on a car for? It covers you if you owe the lender more than your car’s cash value if the car is totaled.
