Confused about Gap Coverage? Here’s everything you need to know!
Gap coverage is a type of car insurance that is often only optional coverage, but can provide a great deal of protection in certain situations. Many drivers don’t fully understand what gap insurance is, why it might be important, and how it works. Here’s what you need to know to help you make an informed decision about whether gap coverage is right for you.
What is gap insurance?
Gap insurance, sometimes called “guaranteed asset protection” or “GAP coverage,” is a type of car insurance designed to protect you if you owe more on your car loan than your car is actually worth. Unfortunately, this can happen if your car is declared a total loss or stolen and not recovered. When this happens, your insurance company may only pay out the actual cash value of your car, which may be less than the outstanding balance on your loan. That shortfall between what you owe on the loan and what the insurance company pays out is where gap insurance comes in.
Why might you need gap insurance?
If you owe more on your car than it is worth, and you can’t afford to pay off the difference out-of-pocket, then gap insurance can be a good idea. The following are some situations where gap insurance may be particularly helpful:
- If you have a high-interest car loan: If you have a high-interest rate on your car loan, the interest may cause you to owe more on the car than it is worth for longer than you would like. Gap insurance can help provide extra protection if this happens.
- If you’re buying a car that is likely to depreciate quickly: Some cars, especially new cars and luxury cars, can lose a lot of value in the first few years after purchase. If you’re buying one of these cars, gap insurance can help protect you financially if your car is totaled before you’ve paid off your loan.
- If you put a small down payment on your car: The less you put down on your car upfront, the more likely it is that you’ll owe more on the car than it is worth at some point during the loan term. Gap insurance can help fill that gap.
- If you have a long loan term: If you have a car loan that stretches out over several years, you may be more likely to owe more on the car than it is worth for a longer period of time, which increases your risk. Gap insurance can offer extra protection in these situations.
How does gap insurance work?
When you purchase gap insurance, it will cover the difference between the actual cash value of your car and the amount you still owe on your car loan if the car is a total loss. For example, if you owe $20,000 on your car loan and your insurance company values your car at only $15,000 after a total loss, gap insurance would cover the $5,000 difference, meaning you wouldn’t be left with a balance to pay.
However, it’s important to know that gap insurance doesn’t cover every expense associated with a total loss. For example, it won’t cover your deductible, any unpaid loan interest or fees, or any accessories or modifications you’ve made to your car.
How much does gap insurance cost?
The cost of gap insurance varies depending on several factors, including:
- The type of car you have
- The length of your car loan
- The amount you’ve borrowed
- The type of gap insurance you choose (not all gap coverage is created equal)
Typically, however, gap insurance costs between 5 and 10 percent of your comprehensive and collision insurance premiums. This may seem like a lot, but when you consider what it can save you in the event of a total loss, it can be well worth the extra expense.
Do you need gap insurance?
Whether you need gap insurance or not depends largely on your individual situation. If you have a car loan and you owe significantly more on the car than it is worth, gap insurance can offer valuable financial protection in the event of a total loss. On the other hand, if you own your car outright or your car loan is small enough that you could cover the shortfall between your loan balance and your car’s actual cash value if needed, you may not need gap insurance.
To help determine whether gap insurance is right for you, consider the following:
- How much you owe on your car loan versus your car’s actual cash value
- How much you could realistically afford to pay if your car were totaled and you had to pay the difference out-of-pocket
- How quickly you expect your car to depreciate in value
Where can you buy gap insurance?
Gap insurance is often sold through car dealerships, but you can also purchase it through your insurance company (if they offer it) or a third-party insurance provider. If you choose to purchase it through your dealership, make sure you read the fine print and understand the terms of the coverage you’re buying. Dealerships have been known to mark up the price of gap insurance and may not always offer the best value.
The bottom line
While gap insurance may not be necessary for every driver, it can be a valuable financial protection for those who owe more on their car than it is worth. Consider your individual circumstances and the potential cost of a total loss when deciding whether gap insurance is right for you. Make sure you do your research to find the best coverage and price for your particular situation.