GAP Insurance – When You’re Upside-Down On Your Car Loan
It’s a well-known fact that cars depreciate in value rapidly, often more quickly than we can pay them off. This is especially true of brand new vehicles, as they are frequently worth less than you paid as soon as you drive them off the lot. What happens then, if you are upside-down on your car loan and get into an accident that totals your car? That’s why, when you’re getting car insurance quotes, you need to look into GAP insurance.
GAP (guaranteed auto protection) car insurance is designed specifically to cover the gap between what your car is worth and how much you owe on it. Typically, your auto insurance policy will only pay what your car is worth – or the Actual Cash Value (ACV) of your car in the case of an accident. GAP insurance kicks in the difference if your car is totaled.
Owners of new vehicles will certainly need GAP insurance, but you might also consider it if you buy a used car. Depending on the age and cost of your vehicle, GAP insurance could save you thousands of dollars you would otherwise have to spend paying off your loan after your insurance company pays off only what the car is worth.
For example, if you have an existing loan on an older vehicle and you trade it in for a newer one, your dealer may offer to pay off the first loan, but he is essentially rolling over the debt into the cost of your newer vehicle. In this case, it’s quite likely you will end up owing more than your car is worth, even though you bought a used car. If your car is totaled, you will be stuck with the bill even though you no longer have use of the vehicle.
Most used car dealers won’t offer GAP insurance for the cars on their lots, but you can search online for GAP coverage. Newer used vehicles (less than 8 years old) are usually eligible for GAP insurance, and some car insurance carriers will allow you to purchase a GAP policy up to 24 months after you bought the car.
GAP insurance is not like car insurance. Essentially, it’s loan insurance. It may even be required by your lender. Remember though, if you paid cash or if your vehicle is worth more than you owe, you do not need GAP insurance.
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