What Exactly is Gap Insurance?
“Gap" insurance covers the difference in the market value of your new vehicle and the amount you owe on your loan. It pays over and above your vehicle's comp and collision payouts to cover a remaining balance on your finance contract.
What is a “Gap"?
When you use a low down payment, and finance a large percentage of the vehicle, you can create a “Gap" in your insurance. As you drive the car off the lot, it changes from a “New" car to a “Used" car. It is at this point where the vehicle depreciates the most in value.
For instance, a brand new 2018 Chevy Equinox might cost you $28,000 at the dealership. If you price a “used" 2018 Chevy Equinox, you will pay more like $19,000. That difference in price is due to depreciation.
Let's say you put a down payment of $2,000 and financed $26,000 to buy that new Chevy Equinox. What if you suffered a total loss to the vehicle in the first few months of ownership? The insurance company's collision coverage will pay you market value at the time of the loss. As stated, the market value would be at $19,000 for the now used vehicle. Of course, finance company still wants their $26,000. This difference between what you owe on the vehicle versus the market value payout from your insurance company is the “Gap". In this case, the Gap would be the $7,000 that you still owe on a totaled vehicle.
What does Gap Insurance cover?
Gap insurance covers the gap between the market value of your vehicle and the balance due on your loan. In our scenario above, it would pay the $7,000 Gap. You would still have no car, but at least you won't have a $7,000 hole in your finances. Keep in mind that some insurance companies place limits on Gap coverage. For example, a common limit on Gap coverage is 25% of the vehicles market value. In the case of the Equinox, the max payout would be $4,750 out of the $7,000 Gap. This would still leave you with a $2,250 tab.
Where can you buy Gap Insurance?
There are three main ways to purchase Gap Insurance: You can buy at the dealership, through your finance company, or from your insurance agent.
•You can secure Gap coverage through your dealership as many leases include the coverage.
•If you arrange your own financing, a credit union or bank, can also find you gap insurance.
•Insurance agents can also endorse gap coverage onto your comp and collision coverage.
Who should buy Gap Insurance?
Anyone who uses a low down payment should consider Gap Insurance. It's usually not too expensive and covers a very real financial risk to the vehicle owner. People who use a large down payment, can do without it. Also, once your payments catch up to the depreciated value of your vehicle, you can cancel Gap Insurance.
When you buy or lease a vehicle with a low down payment, you need Gap Insurance. Fortunately, it's easy and inexpensive to obtain. It covers a real financial risk and is worth the price.
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