What is Auto Gap Insurance?
A good majority of vehicle owners will require some sort of financing to pay for the car of their choice. In most circumstances, your auto insurer or dealership will offer you gap insurance to protect your investment.
If a vehicle you’re financing or leasing is declared a total loss after an accident, auto gap insurance will make up the difference between the car’s actual cash value and what you owe on it. If your car is totaled, or the costs to repair it exceed its value, then gap insurance kicks in.
Is Gap Insurance Required?
You’re eligible for gap insurance if you’re the original leaseholder on a brand new vehicle, or if its less than 3 years old. It’s an optional coverage, but will definitely come in handy if your car is damaged beyond repair.
Auto gap insurance is generally available within a designated time frame from the purchase date of your vehicle. If the vehicle’s within 2-3 years of the newest model, you can often opt in as well.
Related: Guide to Buying a Car
How Does it Work?
If you have a loan on your vehicle, most lenders will require you to have collision and comprehensive coverage. If you have an accident, and the claim is covered, this physical damage coverage will pay up to the car’s depreciated value. Gap insurance is typically used in conjunction.
Say you bought a brand new sports car for $50,000. You get into an accident 6 months later that deems the vehicle a total loss, but is covered through the collision insurance you have—and you still owe $40,000. If the car’s actual cash value is $38,000 at the time of the loss, your policy will cover that amount.
If you didn’t have gap insurance, you would be required to pay the $2,000 gap in these amounts. If you opted for the coverage when buying your car, your broker will help cover it.
Is Auto Gap Insurance Worth It?
While many dealerships will sell you the coverage right away, most insurance brokers offer it at a discount as part of your auto insurance policy. If you’re considering it, think about the following scenarios:
- If you made less than a 20% down payment on your vehicle at the time of purchase
- If your auto loan term is 5 years or longer
- If you’re leasing your car
A new(er) car is an exciting purchase, but it’s important to make sure you can afford it. A vehicle’s value starts to depreciate as soon as you drive it off the lot. We recommend gap insurance to protect yourself and your budget.