Courtesy of iii.org
How gap insurance works
When you buy or rent a new car or truck, the vehicle begins to decrease in value when it leaves the car. . In fact, most cars lose 20 percent of their value within a year. Standard car insurance covers the car's depreciated value – in other words, a standard policy pays the vehicle's current market value at the time of a claim.
If you finance the purchase of a new car and deposit only a small deposit, during the first years of vehicle ownership, the loan amount may exceed the market value of the vehicle itself.
In the event of an accident in which you have damaged or totalized your car, gap insurance covers the difference between what a vehicle is currently worth (which your standard insurance will pay) and the amount you actually owe it.
When you may need gap insurance
It is a good idea to consider buying gap insurance for your new car or truck purchase if you:
- Made less than 20 percent payout
- Funded for 60 months or more [1
- Purchased a vehicle that is written off faster than average
- Rolled negative capital from an old car loan to the new loan
Where you can get gap insurance3 Your car can offer to sell your gap insurance on your new vehicle. But most car insurance companies also offer it, and they usually charge less than the dealer. On most auto insurance, including gap insurance with collision and comprehensive coverage, only about $ 20 per year adds to the annual premium.