Gap insurance is an optional coverage that helps you out if the balance on your car loan is more than what your car is worth, if it were to be totaled in an accident. It is sometimes referred to as loan/lease coverage. Understanding exactly what it is and how it works will help you understand why it is important.
Understanding Loan/lease Coverage
If you are wondering, “What is Gap Insurance?”, it covers the difference between how much is owed on loan and the value of the car if it is stolen or totaled. When you’re in an accident, and something terrible happens to your vehicle, you place a claim on either your collision or comprehensive portion of your auto insurance policy. The insurance provider will pay you the cash value of the vehicle. If you find that the insurance money doesn’t cover all of what’s left on your loan, you still have to finish paying it off. Loan/lease coverage will pay the difference. You’ll find that some lenders and lease companies will insist that you have gap insurance. They do this to protect themselves from people that would walk away from the lease if the vehicle were stolen or totaled. Some gap insurance will cover the total loan balance, along with anything else you had left over from a previous loan.
Is Gap Insurance Necessary?
How quickly your car will depreciate and how much you drive the car will help you decide whether or not you need loan/lease coverage. Your vehicle could depreciate 20% or more within the first year of ownership. Without putting a large down payment on the car when you bought it, you probably do owe more than it’s worth. If you were able to pay cash or have paid off your loan, there’s no reason for this coverage. Loan/lease coverage is worth it if you have a small down payment, you have a long finance period, you drive a lot, or you purchased a car that depreciates quickly.
To figure out the value of gap insurance, you have to find out what your car’s value is, according to Kelley Blue Book. Look ahead to the car’s value for each year of ownership until it is fully paid off. Review the terms of your loan, and figure out how much you’ll still owe each year. Compare this to the value of the car for each of these years. Consider how much gap insurance will cost during that period. The difference between your vehicle’s value and how much you owe will be the amount that gap insurance will protect you for. If this amount is the same, or less than, what you’ll pay for coverage, you should skip it. Typically, buyers will benefit the most from gap insurance when the car is fairly new. Don’t look for it to cover any of your penalties on a lease or late fees you have acquired over time.
What Does Gap Insurance Cover?
This type of coverage is wonderful to have when you lease a vehicle. It gets you off the hook for the remainder of the lease after an accident that totals the car. You may also want to consider it if you were only able to get a loan that has a long timeframe. This includes anything over five years. Loan-lease coverage is certainly recommended when you weren’t able to put much money down on the vehicle or if you added the remaining balance of a previous loan into the new one. Gap insurance would help the most if you purchased a vehicle that depreciates faster than other cars, such as luxury brands and expensive flagship models.
Gap insurance can be a great investment if you know you owe more than what you could sell your vehicle for. The cost of loan/lease coverage can be added to your car loan, but it will cost more because you’ll be paying interest on it. It also means that you lose the ability to cancel the coverage. You don’t want to pay for it once it is no longer beneficial.