When you purchase a new vehicle you will often be offered Gap insurance coverage by the dealer.
This is because new vehicles are subject to high depreciation when you buy them which takes place the moment you drive them off the lot.
God forbid you were to crash and total the vehicle on the way home from the dealer, then your auto insurance policy would only cover the depreciated value for the collision coverage on your auto policy.
This means that if your vehicle depreciates by $5,000 when you buy it then you would lose $5,000 after being compensated by insurance for your auto policy once you use the funds to pay off the car loan for the full value before depreciation.
This is why Gap insurance is so important for new vehicles and it is also great insurance coverage for many pre-owned and not brand new vehicles as well.
In today’s post, we are going to answer the question “what is Gap insurance?” and “who is Gap insurance best for?”
What is Gap Insurance
The acronym, GAP which stands for Guaranteed Asset Protection (or Guaranteed Auto Protection) refers to a kind of insurance made for drivers who have some debt to pay on the vehicle they own.
It’s advisable to consider purchasing a Gap policy whether your vehicle is leased or gotten on a loan. It’s especially so if you think the debt you owe on your vehicle may be more than the vehicle’s worth.
Your vehicle may be marked “totaled” by the insurance company at fault after being involved in a number of accidents. This implies that the cost of necessary and appropriate repairs would be more than the vehicle’s worth. Therefore, they would rather pay you what the car is worth.
If your debt to the bank is more than the worth of your totaled car, you’ll still be in debt and may or may not be able to pay it. Gap coverage comes in at this point.
How Gap Insurance Works if Your Car is Totaled
Let us assume that there was an accident and your car was totaled. If the fault is the other driver’s, you would receive a check from their liability insurance policy worth the car’s value. If the fault is yours and you have collision coverage, the same hand would be dealt the other driver by your insurance company.
However, a little problem that may arise is if at the time the accident occurred, you had negative equity on the vehicle. This is also referred to as being “upside-down”.
In this situation, your debt to the bank will not be offset by the check the insurance company will issue you. The balance would have to be settled with your own funds. You may have to make a huge payment to your lender while searching for another vehicle you can afford —this depends on how much negative equity you hold.
If you were injured, had to skip work, or have a deductible that’s quite high to pay for an accident in which you were at fault, the financial burden could become even more complicated.
But if you had Gap coverage, the complete amount for the vehicle loan would be covered. Gap insurance policies cover what is left of the debt you owe the bank after the insurance company has paid the worth of your totaled car.
This means that any depreciation gap in the value your insurance company pays for the collision damage versus what is left on your loan will be covered with your gap policy.
Be it $5 or $15,000, the difference is covered and you’d have no need to dig a hole in your own pocket to settle the final loan.
Who is Covered by Gap Insurance?
As suggested by the name, Gap insurance is designed to settle the difference between your debt and the worth of your totaled vehicle. This coverage is very crucial for borrowers who choose any of the following:
- A little down payment.
- Small monthly deposits to settle their car loan.
- Long loan terms.
- An extremely high-interest rate.
- A vehicle lease (sometimes, your lease agreement includes gap coverage).
The reason for this is that their vehicles depreciate in value at a faster rate than the settlement of their loan balance.
However, this implies that Gap insurance is intended for drivers with outstanding debt on their vehicles only. If you already own the car and have no need for the coverage because there can’t be a “gap” to be filled by the coverage.
If you are looking for the cheapest auto insurance policies in Maryland then contact us today for a quote from our independent insurance agency.
We can offer discounts for bundling home and hazard insurance policies as well.