If you have recently bought a new car and had to take out a loan to buy it, then you really want to consider gap insurance.
What is gap insurance?
First, gap insurance goes by many names. Some other common names include loans / leasing gaps and car loans / leasing collateral, for example. So, what IS gap insurance?
The simplest explanation is this: it pays the balance of a car loan or lease after a total loss covered.
Here is an example of how gap insurance works
You buy a car and finance $ 30,000 of the purchase price. A month later, you run into someone and count your car. Remember that the majority of vehicle insurance claims are paid based on the actual cash value of the vehicle ̵1; that is, the value of the vehicle AT THE LOSS. Can vehicles sink? Absolutely and they do! The value of a new vehicle decreases by about 20% during the first year of ownership and about 15% per year for the next four years.
Let’s say the actual cash value of the vehicle at the time of the loss is $ 22,000. That’s ALL the insurance company will pay you. But you still owe $ 30,000 to the bank. And no…. they don’t just give you a free card and say, “Well, you do not have to pay it back because you no longer have the car.” NO.
So you raise $ 22,000 from your insurance company. Based on my math, that means $ 30,000 – $ 22,000 = $ 8,000 left to pay to the bank. Who pays the $ 8,000? YOU DO! YIKES …….
If you have a gap insurance, it pays $ 8,000. WHAT? Yes – it’s pretty amazing. Because there is nothing worse than repaying a loan on a car you no longer own. And it happens. We’ve seen it happen.
What gap insurance is NOT designed to do
Before you think this is the golden ticket, there are some situations where the gap insurance does not pay off.
- Delayed rent or loan payments.
- Any penalties assessed according to a lease agreement for excessive use, abnormal wear or high mileage.
- Deposits are not refundable by the landlord.
- Costs for any extended guarantees or credit life / disability insurance (usually purchased with a loan).
- Balances transferred from previous loans or leasing agreements. THIS is the great folks. You may still be guilty of your existing car, but a lot shows up and you MUST have the new car. Many resellers will just “roll” that balance to your new loan or lease. Yes, you still owe it, but now it’s part of your new loan or lease. The running insurance does NOT pay for this previous balance.
So how do I get a gap insurance?
It is usually just a supplement (AKA endorsement) to your car insurance. The premium can vary between companies, but I can say with certainty that any premium that is taken out is still a SMALL amount compared to the possible payment. We have seen premiums ranging from $ 10- $ 70 for one year. Carriers will also have rules to determine if you can get it based on things like the age of the vehicle and whether it previously has the title or not.
In addition, most companies will require both extensive and collision on your vehicle. But if you have just bought a new car and financed it, you still need to have both.
It is important to note that gap insurance is often available from your dealer. I am convinced that the intention is the same regardless of whether you buy from the dealer or your car insurance. You just need to ask your dealer for their details. The cost is usually added to your monthly loan payment.