When you buy or lease a car, the dealership folks might tell you about gap insurance. It helps cover the difference between your car’s worth and what you still owe if it is totaled or stolen.
Standard car insurance covers the actual cash value of a car, not how much you owe on a loan. Gap insurance can help in certain situations, but it’s not always needed. Let’s look at when it makes sense and when it doesn’t.
What is gap insurance?
Gap (Guaranteed Asset Protection) insurance covers the gap between what you owe on your vehicle and its market value if you make a claim due to it being totaled or stolen.
A standard auto insurance policy typically pays out only your vehicle’s ACV at the time of loss, not what you still owe on the loan or lease. That difference can be thousands of dollars, especially in the early years of a loan.
Gap insurance protects you from having to pay out-of-pocket for a car you no longer have.
When is gap insurance worth the money?
Consider getting gap insurance in the following situations:
- Low down payment: If you paid less than 20% of the car’s price as a down payment, there’s a good chance you’ll owe more than the car is worth in the initial years of your loan term. Gap insurance steps in to cover that difference if your vehicle is totaled or stolen.
- Long loan term: A longer loan term means you’re paying off the loan over an extended period, and the car’s value will depreciate faster.
- Leasing: Leased cars are some of the fastest depreciating assets, and leases often come with a bigger gap between what you owe and the car’s value. Many lease agreements include gap insurance by default, but if yours doesn’t, buying it separately is a good idea.
- You bought a car that loses value quickly: Luxury cars, electric vehicles and some newer models drop in value faster than other cars. If your vehicle is known for high depreciation, you’re more likely to owe more than it’s worth during the first few years.
- You’re in a financially tight situation: Totaling your car doesn’t mean your loan disappears. If your insurance payout falls short, you’re still on the hook. Gap insurance protects you from that unexpected financial burden.
Is gap insurance required by law?
Gap insurance is not required by law, but it may be required by a lender or leasing company as part of a financing agreement. It is an optional form of coverage that helps pay the difference between what your car is worth and what you still owe on your loan if the vehicle is totaled or stolen. This can be especially useful for new cars that depreciate quickly or for buyers who made a small down payment or have a long loan term.
When doesn’t gap insurance make sense?
Gap insurance can be a financial lifesaver for some car owners, but in certain situations, it’s simply not worth the cost.
If you made a big down payment, have a short loan term or are close to paying off your loan, you’re less likely to need it. It also doesn’t make sense if you’ve paid off your car or your insurance already includes similar coverage. If there’s little or no gap between what you owe and what your vehicle is worth, gap insurance probably isn’t worth the extra cost.
Final thoughts
Gap insurance can be really helpful if you owe more on your car than it’s worth. If your car gets totaled or stolen, it covers the difference, so you’re not on the hook for paying off a loan for a car you no longer have. For many people, a gap insurance policy offers a safety net and peace of mind.
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